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 (28,200 units)				$	1,128,000
Variable expenses:
Variable cost of goods sold	$	473,760
Variable selling and administrative		194,580			668,340
Contribution margin					459,660
Fixed expenses:
Fixed manufacturing overhead		322,040
Fixed selling and administrative		161,870			483,910
Net operating loss				$	( 24,250)

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	33,200
Units sold	28,200
Variable costs per unit:
Direct materials		$	7.20
Direct labor		$	7.60
Variable manufacturing overhead		$	2.00
Variable selling and administrative		$	6.90

Required:

3. During the second quarter of operations, the company again produced 33,200 units but sold 38,200 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

1st Quarter- Income Statement	Variable Costing						Absorption Costing
							Unit Price (P)	Cost
Production (units)		33,200.00	A			Production (units)		33,200.00	A
Sales (units)		28,200.00	B			Sales (units)		28,200.00	B
						Closing (units)		5,000.00	C=A-B
Sales		1,128,000.00	H			Sales	40.00	1,128,000.00	D=P*B
Variable Expenses	473,760.00					Direct Materials	7.20	239,040.00	E=P*A
Variable Selling & administrative	194,580.00					Direct Labor	7.60	252,320.00	F=P*A
Total Variable		668,340.00				Variable Manufacturing	2.00	66,400.00	G=P*A
Contribution		459,660.00				Fixed Manufacturing	9.70	322,040.00	H=P*A
Fixed Manufacturing	322,040.00		C			Cost of production	26.50	879,800.00	I=E+F+G+H
Fixed Selling & administrative	161,870.00	483,910.00	D			Closing (units)		132,500.00	J=C*I
Cost of sales	1,152,250.00					Cost of goods sold	26.50	747,300.00	K=I-J
Net Profit		(24,250.00)				Variable Selling & administrative	6.90	194,580.00	L=P*B
						Fixed Selling & administrative	5.74	161,870.00	M=P*B
Fixed Manufacturing per unit		9.70	E=C/A			Cost of sales	39.14	1,103,750.00	N=K+L+M
Fixed Selling & administrative per unit		5.74	F=D/B			Net Profit		24,250.00	O=D-N
Sales per unit		40.00	G=H/B
						Ans to Q a: Unit product cost under absorption costing is $ 39.14.
						Ans to Q b: Company’s absorption costing net operating income for the quarter is $ 24,250.
						Ans to Q c: Reconciliation:
						Net Profit -absorption costing		24,250.00
						Add: Cost of sales -absorption costing		1,103,750.00
						Less: Cost of sales -variable costing		1,152,250.00
						Net Profit -variable costing		(24,250.00)