Question

Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the beginning of the year. Getting the company through its first quarter of operations placed a considerable strain on Ms. Tyler’s personal finances. The following income statement for the first quarter was prepared by a friend who has just completed a course in managerial accounting at State University.

Tami’s Creations, Inc. Income Statement For the Quarter Ended March 31
Sales (29,000 units)				$	1,160,000
Variable expenses:
Variable cost of goods sold	$	475,600
Variable selling and administrative		195,750			671,350
Contribution margin					488,650
Fixed expenses:
Fixed manufacturing overhead		288,000
Fixed selling and administrative		214,150			502,150
Net operating loss				$	( 13,500)

Ms. Tyler is discouraged over the loss shown for the quarter, particularly because she had planned to use the statement as support for a bank loan. Another friend, a CPA, insists that the company should be using absorption costing rather than variable costing and argues that if absorption costing had been used the company probably would have reported at least some profit for the quarter.

At this point, Ms. Tyler is manufacturing only one product—a swimsuit. Production and cost data relating to the swimsuit for the first quarter follow:

Units produced	32,000
Units sold	29,000
Variable costs per unit:
Direct materials		$	7.50
Direct labor		$	7.30
Variable manufacturing overhead		$	1.60
Variable selling and administrative		$	6.75

Required:

1. Complete the following:

a. Compute the unit product cost under absorption costing.

b. What is the company’s absorption costing net operating income (loss) for the quarter?

c. Reconcile the variable and absorption costing net operating income (loss) figures.

3. During the second quarter of operations, the company again produced 32,000 units but sold 35,000 units. (Assume no change in total fixed costs.)

a. What is the company’s variable costing net operating income (loss) for the second quarter?

b. What is the company’s absorption costing net operating income (loss) for the second quarter?

c. Reconcile the variable costing and absorption costing net operating incomes for the second quarter.

Answer 1

req 1.
Construct The Absorption Costing Unit Product Cost
				Q-1
Direct Material				7.50
Direct labour				7.30
Variable Manufacturing overheads				1.60
Fixed Manufacturing overheads				9.00	(288000/32000)
Absorption costing unit prroduct cost				25.40
Construct the Absorption Costing Income Statement Under FIFO
				Q-1
Sales				$1,160,000
Cost of Goods sold				736600
Gross Margin				$423,400
Selling and distribution expense				409,900	(29000*6.75+214150)
Net operating income				13,500
Reconciliation statement
					Q-1
Net Income as per Variable costing					-13500
Add: Fixed Mfg oh deferred in ending inventory					27000
	(3000 units @ 9)
Net Income as per Abosprtion costing					13500
Req 3-a
Compute the Variable costing Unit Product cost
Direct Material				7.50
Direct labour				7.30
Variable Manufacturing overheads				1.60
Variable costing unit prroduct cost				16.40
Construct The Variable Costing Income Statement under FIFO
				Q-2
Sales					1,400,000	(1160000/29000*35000)
Less: Variable cost
variable cost of goods sold				574,000
Variable selling expense				236,250	810,250
Contribution margin					589,750
Fixed expense:
Fixed Manufacturing overheads					288,000
Fixed selling expense					214,150
Net operating Income					87,600
Construct The Absorption Costing Unit Product Cost
				Q-2
Direct Material				7.50
Direct labour				7.30
Variable Manufacturing overheads				1.60
Fixed Manufacturing overheads				9.00	(288000/32000)
Absorption costing unit prroduct cost				25.40
Construct the Absorption Costing Income Statement Under FIFO
				Q-2
Sales				$1,400,000
Cost of Goods sold				889000
Gross Margin				$511,000
Selling and distribution expense				450,400	(35000*6.75+214150)
Net operating income				60,600
Reconciliation statement
					Q-2
Net Income as per Variable costing					87600
Less Fixed Mfg oh released in beginning inventory					27000
	(3000 units @ 9)
Net Income as per Abosprtion costing					60600