Question

Ida 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 $860. Selected data for the company’s operations last year follow:
Units in beginning inventory 0
Units produced 320
Units sold 285
Units in ending inventory 35
Variable costs per unit:
Direct materials $135
Direct labor $355
Variable manufacturing overhead $30
Variable selling and administrative $15
Fixed costs:
Fixed manufacturing overhead $64,000
Fixed selling and administrative $27,000

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

Sales $245,100
Cost of goods sold 205,200
Gross margin 39,900
Selling and administrative expense 31,275
Net operating income $8,625

Required:
a. Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period.
b. Prepare an income statement for the year using variable costing.

Answer 1

Answer:

Part a

$7,000

Part b

Ida Sidha Karya Company

Income statement for the year using variable costing

Sales ($860 x 285)                                                                        $245,100

Less Cost of Sales

Opening Inventory                                                           $0

Add Cost of Goods Manufactured ($520 x 320)     $166,400

Less Ending Inventory ($520 x 35)                           ($18,200)  ($148,200)

Contribution                                                                                    $96,900

Less Expenses

Fixed manufacturing overhead                                 $64,000

Variable selling and administrative ($15 x 285)          $4,275

Fixed selling and administrative                                $27,000   ($95,275)

Net Income (Loss)                                                                            $1,625

Explanation:

Part a

Only manufacturing costs are included in inventory valuation.

Fixed Costs in Inventory = $64,000 / 320 x 35 = $7,000

Part b

Product Cost using variable costing method include only variable manufacturing costs.

Fixed manufacturing costs and non - manufacturing costs are treated as Period costs expensed in the Income Statement.

Product Cost

Direct materials                                       $135

Direct labor                                             $355

Variable manufacturing overhead          $30

Total                                                        $520