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

Question

Ida Sidha Karya Company is a family-owned company located in the village of Glanyar 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: 1. Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period. 2. Prepare an income statement for the year using variable costing.

Explanation / Answer

1. Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period.

Fixed manufacturing cost deferred in ending inventory = (64000/320)*35 = 7000

2. Prepare an income statement for the year using variable costing.

Sales 245100 Less: Variable cost Direct material (285*135) (38475) Direct labour (285*355) (101175) Variable manufacturing overhead (285*30) (8550) Variable selling and administrative expense (285*15) (4275) Total variable expenses (152475) Contribution margin 92625 Less: Fixed expenses Fixed manufacturing overhead (64000) Fixed selling and administrative Expenses (27000) Total fixed expense (91000) Net operating income 1625

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