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 $920. Selected data for the company’s operations last year follow:

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

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.

Units in beginning inventory 0 Units produced 275 Units sold 260 Units in ending inventory 15 Variable costs per unit: Direct materials $ 110 Direct labor $ 320 Variable manufacturing overhead $ 40 Variable selling and administrative $ 15 Fixed costs: Fixed manufacturing overhead $ 77,000 Fixed selling and administrative $ 33,000

Explanation / Answer

1. Absorption costing :

Total manufacturing Fixed overhead cost = 77,000 . Total units produced for the year = 275

Fixed Mfg Overhead cost per unit = 77000/275 = 280 per unit.

Company's closing inventory quantity = 15

Fixed manufacturing overhead cost included in the company's inventory at the end of ;ast year = 4,200 (280 * 15).

2. Income statement using variable costing :

117,000

Mfg,Selling and admin exp

Observation : the net operating income is less by 4,200 since the closing stock does not consider fixed manufacturing overhead costs . Only variable costs are considered in valuation of inverntory under variable costing. Hence, cost per unit is 110 +320 + 40 = 470. No of units produced = 260 . The multplication provides the cost of good sold. All fixed cost and selling/admin costs are period costs and expensed out.

Particulars Amount 1 Sales 239,200 2 Cost of Good sold Variable manufacturing costs                           122,200 3 Gross Margin

117,000

4

Mfg,Selling and admin exp

113900 5 Net operating Income 3,100

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