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 $937. Selected data for the company’s operations last year follow:

Units in beginning inventory 0
Units produced 11,000
Units sold 8,000
Units in ending inventory 3,000
Variable costs per unit:
Direct materials $ 250
Direct labor $ 440
Variable manufacturing overhead $ 55
Variable selling and administrative $ 15
Fixed costs:
Fixed manufacturing overhead $ 900,000
Fixed selling and administrative $ 690,000

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 gamelan.

Instructions are below.

Explanation:

Giving the following information:

Units produced 11,000

Variable costs per unit:

Direct materials $ 250

Direct labor $ 440

Variable manufacturing overhead $ 55

Fixed costs:

Fixed manufacturing overhead $ 900,000

The difference between absorption and variable costing is that the last one includes the fixed manufacturing overhead in its product costs.

1) Absorption costing:

Unitary fixed manufacturing overhead= 900,000/11,000= $81.82

Unit product cost= 250 + 440 + (55+81.82)= $826.82

2) Variable costing:

Unit product cost= 250 + 440 + 55= $745

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