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 $880. Selected data for the company's operations last year follow: 105 A Units in beginning inventory Units produced Units sold Units in ending inventory Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative Fixed costs: Fixed manufacturing overhead Fixed selling and administrative 315 A A 40 A $ 63,000 $ 32,000 The absorption costing income statement prepared by the company's accountant for last year appears below: Sales Cost of goods sold Gross margin Selling and administrative expense Net operating income $ 224,400 173,400 51,000 42,200 $ 8,800 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

1	Determine how much of the ending inventory consists of the fixed manufacturing overhead costs deferred in inventory to the next period?
	Units in ending inventory	25
	Fixed manufacturing overhead per unit	225	(63000/280)
	Fixed manufacturing overhead cost differed	5625
2	Prepare an income statement for last year using variable costing?
		$	$
	Sales		224400
	Variable expense:
	Variable selling and administrative expense [255*$40]	10200
	Variable cost of goods sold [255*(105+315+35)]	116025	126225
	Contribution margin		98175
	Fixed manufacturing overhead	63000
	Fixed selling and administrative	32000	95000
	Net operating income		3175
	Reconciliation schedule
	Net operating income under variable costing	3175
	Add: Fixed manufacturing overhead differed in inventory	5625
	Net operating income under absorption costing	8800