Question

Exercise 6-2 Variable Costing Income Statement; Explanation of Difference in Net Operating Income [LO6-2]

Ida Sidha Karya Company is a family-owned company located in the village of Glanyar 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 $950. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		250
Units sold		235
Units in ending inventory		15
Variable costs per unit:
Direct materials	$	135
Direct labor	$	345
Variable manufacturing overhead	$	30
Variable selling and administrative	$	20
Fixed costs:
Fixed manufacturing overhead	$	65,000
Fixed selling and administrative	$	25,000

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

Sales	$	223,250
Cost of goods sold		180,950
Gross margin		42,300
Selling and administrative expense		29,700
Net operating income	$	12,600

Required:

1.	Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period. Total fixed manufacturing overhead in ending inventory $3,900

2.	Prepare an income statement for the year using variable costing. Ida Sidha Karya Company Variable Costing Income Statement Variable expenses: 0 0 Fixed expenses: 0 $0

Answer 1

1.

Total Fixed manufacturing overhead	65,000
Number of units produced	$     250
Fixed manufacturing overhead per unit ($65,000/250)	$     260
Total fixed manufacturing overhead in ending inventory (15*$260)	$ 3,900

2.

Idla Sidha Karya Company
Variable costing income statement
Sales		$ 223,250
Less: Variable expenses
Direct material (235*$135)	$ 31,725
Direct labour (235*$345)	$ 81,075
Variable manufacturing overhead (235*$30)	$    7,050
Variable selling and administrative expenses (235*$20)	$    4,700
Total variable costs		$ 124,550
Contribution margin		$    98,700
Less: Fixed costs
Fixed manufacturing overhead	$ 65,000
Fixed selling and administrative expenses	$ 25,000
Total fixed costs		$    90,000
Net operating income		$      8,700