Question

da Sidha Karya Company is a family-owned company located on the island of Bali in Indonesia. The company produces a handcrafted Balinese musical instrument called a gamelan that is similar to a xylophone. The gamelans are sold for $990. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		250
Units sold		230
Units in ending inventory		20
Variable costs per unit:
Direct materials	$	145
Direct labor	$	365
Variable manufacturing overhead	$	40
Variable selling and administrative	$	25
Fixed costs:
Fixed manufacturing overhead	$	65,000
Fixed selling and administrative	$	29,000

The absorption costing income statement prepared by the company’s accountant for last year appears below:

Sales	$	227,700
Cost of goods sold		186,300
Gross margin		41,400
Selling and administrative expense		34,750
Net operating income	$	6,650

Required:

1. Under absorption costing, how much fixed manufacturing overhead cost is included in the company's inventory at the end of last year?

2. Prepare an income statement for last year using variable costing.

Answer 1

WORKING NOTES : 1
	beginning Inventory	-	Units
	Unit Produced =	250	Units
	Unit Sold	230	Units
	Closing Stock	20	Units
WORKING NOTES : 2
	Calculation of cost of production units by using absorption and variable Costing
	Particulars	Absorption Costing Amount	Variable Costing Amount
	Direct Materials	$                              145	$                           145
	Direct Labor	$                              365	$                           365
	Vairable Manufacturing Overhead	$                                40	$                             40
	Fixed Manufacturing Overhead ($ 65,000 / 250 Units)	$                              260	$                              -
	Cost of Production	$                              810	$                           550
Solution: 1
	Units at end of the period	20	Units
	Multiply By	"X" By
	Fixed manufacturing overhead per unit	$                              260
	Fixed manufacturing overhead included in inventory	$                          5,200
	Answer = $ 5,200
Solution: 2
	VARIABLE COSTING INCOME STATEMENTS		Variable Costing
	Particulars		Amount
	Sales		$                   227,700
	Cost of Goods Sold:
	Beginning inventory	$                                 -
	Cost of Goods Manufactured (250 Units X $ 550)	$                      137,500
	Less: Ending Inventory (20 Units X $ 550)	$                        11,000
			$                   126,500
	Less: Variable Selling Expenses (230 Units X $ 25)		$                       5,750
	Contribution		$                     95,450
	Fixed Expenses
	Less: Fixed Manufacturing overhead	$                        65,000
	Less : Fixed Selling Expenses	$                        29,000
	Total Fixed Expenses		$                     94,000
	Net Income		$                       1,450