Exercise 7-2 Variable Costing Income Statement; Explanation of Difference in Net Operating Income [LO7-2]

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. Selected data for the company's operations last year follow:

Units in beginning inventory0Units produced250Units sold225Units in ending inventory25Variable costs per unit:Direct materials$100Direct labor$320Variable manufacturing overhead$40Variable selling and administrative$20Fixed costs:Fixed manufacturing overhead$60,000Fixed selling and administrative$20,000

The absorption costing income statement prepared by the company's accountant for last year appears as shown:

Sales$191,250Cost of goods sold157,500Gross margin33,750Selling and administrative expense24,500Net operating income$9,250

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. What is the amount of thedifference in net operating income between the two costing methods?