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 $990. Selected data for the company’s operations last year follow:

Units in beginning inventory		0
Units produced		240
Units sold		225
Units in ending inventory		15
Variable costs per unit:
Direct materials	$	120
Direct labor	$	330
Variable manufacturing overhead	$	50
Variable selling and administrative	$	25
Fixed costs:
Fixed manufacturing overhead	$	72,000
Fixed selling and administrative	$	27,000

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

Sales	$	222,750
Cost of goods sold		180,000
Gross margin		42,750
Selling and administrative expense		32,625
Net operating income	$	10,125

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. What is the amount of the difference in net operating income between the two costing methods?

Answer 1

Solution 1:

Fixed manufacturing overhead cost in inventory at the end of last year = (Total fixed manufacturing overhead/ units produced) * Units in ending inventory

= ($72000/240) *15 = $4,500

Solution 2:

10 $222,750 14 15 16 Ida Sidha Karya Company Income Statement (Variable Costing) Net Sales Revenue Less: Variable costs: Variable cost of goods sold [225*(120+330+50)] $112,500 Variable Selling and Administrative costs(225*25) $5,625 Gross Profit Less: Fixed Costs Fixed Cost of Goods sold $72,000 Fixed Selling and Administrative costs $27,000 Operating Income $118,125 $104,625 19 20 21 $99,000 $5,625 22 23 24 25 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 Sheet245 Sheet65 (7) Sheet820 Sheet22 She

Difference in net operating income between the two costing methods = $10125 - $5625 = $4,500