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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 $850. Selected data for the company’s operations last year follow. Assume that the company uses absorption costing.

Units in beginning inventory 0
Units produced 14,000
Units sold 12,000
Units in ending inventory 4,000
Variable costs per unit:
Direct materials $100
Direct labor $320
Variable manufacturing overhead $40
Variable selling and administrative $20
Fixed costs:
Fixed manufacturing overhead $660,000
Fixed selling and administrative $720,000


Required:
a. Assume that the company uses absorption costing. Compute the unit product cost for one gamelan.
b. Assume that the company uses variable costing. Compute the unit product cost for one gamelan.

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Answer:

Instructions are listed below

Explanation:

Giving the following information:

Variable costs per unit:

Direct materials $100

Direct labor $320

Variable manufacturing overhead $40

Fixed costs:

Fixed manufacturing overhead $660,000

Units produced 14,000

The difference between the absorption costing method and the variable costing method is that the first one includes the fixed manufacturing overhead in the product cost.

Absorption cost method:

Unitary fixed manufacturing overhead= 660,000/14,000= $47.14

Unitary total cost= 100 + 320 + 40 + 47.14= $507.14 per unit

Variable cost method:

Unitary total cost= direct material + direct labor + variable overhead

Unitary total cost= 100 + 320 + 40= $460 per unit

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