Ida Sidha Karya Company is a family-owned company located in the village of Gian

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 $850. Selected data for
the company’s operations last year follow:

Units in beginning inventory . . . . . . . . . . . . . . . . . . . . 0
Units produced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Units sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
Units in ending inventory . . . . . . . . . . . . . . . . . . . . . . . 25
Variable costs per unit:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $320
Variable manufacturing overhead . . . . . . . . . . . . . . . $40
Variable selling and administrative . . . . . . . . . . . . . . $20
Fixed costs:
Fixed manufacturing overhead . . . . . . . . . . . . . . . . . $60,000
Fixed selling and administrative . . . . . . . . . . . . . . . . $20,000
Variable Costing and Segment Reporting: Tools for Management 263
Required:
1. Assume that the company uses absorption costing. Compute the unit product cost for one
gamelan.
2. Assume that the company uses variable costing. Compute the unit product cost for one
game

Explanation / Answer

1. Under absorption costing, all manufacturing costs (variable and fixed) are included in product costs.

Direct materials.......................................................

$100

Direct labor.............................................................

320

Variable manufacturing overhead..............................

40

Fixed manufacturing overhead ($60,000 ÷ 250 units)..

  240

Absorption costing unit product cost..........................

$700

2. Under variable costing, only the variable manufacturing costs are included in product costs.

Direct materials.......................................................

$100

Direct labor.............................................................

320

Variable manufacturing overhead..............................

   40

Variable costing unit product cost..............................

$460

    Note that selling and administrative expenses are not treated as product costs under either absorption or variable costing. These expenses are always treated as period costs and are charged against the current period’s revenue.

Direct materials.......................................................

$100

Direct labor.............................................................

320

Variable manufacturing overhead..............................

40

Fixed manufacturing overhead ($60,000 ÷ 250 units)..

  240

Absorption costing unit product cost..........................

$700

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