Exercise 5-1

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. Selcted 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 cost 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

Refer to the data in Exercise 5-1 for Ida Sidha Karya Company. The absorption costing income statement prepared by the company's accountant for last year appears below: sales..........................$191,250 cost of goods sold...........157,500 gross margin................33,750 selling and administrative expense......24,500 net operating income..........$9,250 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. Explain the difference in net operating income between the two costing methods.