Shastri Bicycle of Bombay, India, produces an inexpensive, yet rugged, bicycle for use on the city’s crowded streets that it sells for 500 rupees.
Selected data for the company’s operations last year follow:
Units in beginning inventory 0
Units produced 10,000
Units sold 8,000
Units in ending inventory 2,000
Variable costs per unit:
Direct materials 120
Direct labor 140
Variable manufacturing overhead 50
Variable selling and administrative 20
Fixed manufacturing overhead 600,000
Fixed selling and administrative 400,000
The absorption costing income statement prepared by the company’s accountant for last year appears below.
Cost of goods sold 2,960,000
Gross margin 1,040,000
Selling and administrative expense 560,000
Net operating income 480,000
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.