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 (28,500 units)				$	1,140,000
Variable expenses:
Variable cost of goods sold	$	427,500
Variable selling and administrative		196,650			624,150
Contribution margin					515,850
Fixed expenses:
Fixed manufacturing overhead		283,500
Fixed selling and administrative		245,850			529,350
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	31,500
Units sold	28,500
Variable costs per unit:
Direct materials		$	7.20
Direct labor		$	6.10
Variable manufacturing overhead		$	1.70
Variable selling and administrative		$	6.90

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 31,500 units but sold 34,500 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

Answer 1a

Absorption Costing	Amount
Direct Material	7.2
Direct Labor	6.1
Variable Overhead	1.7
Fixed Overhead	9
Unit Product cost	24

Answer 1b

Absorption Costing Income Statement
Sales		1140000
Beginning Invenotry
Add: Cost of goods manufactured	756000
Goods available for sale	756000
Less: Ending Inventory	72000
Cost of goods sold	684000
Gross Profit		456000
Selling and administrative cost	442500
Net operating income		13500

Answer 1c

Reconcilation	Amount
Net operating income (Absorption Costing)	13500
Less: Fixed Manufacturing Deffered	27000
in Closing Inventories
Net operating income (Variable Costing)	-13500

Answer 3a

Variable Costing income statement
Sales		1380000
Less: Variable Expenses
Beginning Invenotry	45000
Add: Cost of goods manufactured	472500
Goods available for sale	517500
Less: Ending Inventory
Variable cost of goods sold	517500
Variable selling and administrative cost	238050
Contribution Margin		624450
Less: Fixed Expenses
Manufacturing Overhead	283500
Selling and administrative	245850
Net operating income		95100

Answer 3b

Absorption Costing Income Statement
Sales		1380000
Beginning Invenotry	72000
Add: Cost of goods manufactured	756000
Goods available for sale	828000
Less: Ending Inventory
Cost of goods sold	828000
Gross Profit		552000
Selling and administrative cost	483900
Net operating income		68100

Answer 3c

Reconcilation	Amount
Net operating income (Absorption Costing)	68100
Add: Fixed Manufacturing Released	27000
in Opening Inventories
Net operating income (Variable Costing)	95100