Question

Ida Sidha Karya Company is a family-owned company located in the village of Gianyar 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 $870. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		17,000
Units sold		14,000
Units in ending inventory		3,000
Variable costs per unit:
Direct materials	$	200
Direct labor	$	460
Variable manufacturing overhead	$	54
Variable selling and administrative	$	17
Fixed costs:
Fixed manufacturing overhead	$	790,000
Fixed selling and administrative	$	980,000

Required:

1. Assume that the company uses absorption costing. Compute the unit product cost for one gamelan. (Round your intermediate calculations and final answer to the nearest whole dollar amount.)

2. Assume that the company uses variable costing. Compute the unit product cost for one gamelan.

Answer 1

1)     the company uses absorption costing

                 Under absorption costing all variable manufacturing costs and fixed manufacturing costs are included in product costs

                               Direct materials                                             =    $200

                               Direct labour                                                  =    $460

                           Variable manufacturing overheads               =   $54

                           Fixed manufacturing overheads                     = $46

                              ($790,000/17,000)= 46.47

                Absorption costing unit product cost                    = $760

   the unit product cost for one gamelon under absorption costing = $760

2)      the company uses variable costing

                  Under variable costing only variable manufacturing costs are included in product costs

                               Direct materials                                             =    $200

                               Direct labour                                                  =    $460

                           Variable manufacturing overheads               =   $54

                          Variable costing unit product cost                 = $714

     the unit product cost for one gamelon under variable costing = $714