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 (28,250 units)				$	1,130,000
Variable expenses:
Variable cost of goods sold	$	446,350
Variable selling and administrative		193,512			639,862
Contribution margin					490,138
Fixed expenses:
Fixed manufacturing overhead		329,175
Fixed selling and administrative		185,712			514,888
Net operating loss				$	( 24,750)

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	33,250
Units sold	28,250
Variable costs per unit:
Direct materials		$	7.50
Direct labor		$	6.70
Variable manufacturing overhead		$	1.60
Variable selling and administrative		$	6.85

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 33,250 units but sold 38,250 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

Solution 1a:

Computation of Unit Product Cost - Absorption Costing
Particulars	Per unit
Direct material	$7.50
Direct Labor	$6.70
Variable manufacturing overhead	$1.60
Fixed manufacturing overhead ($329,175/ 33250)	$9.90
Unit Product Cost	$25.70

Solution 1b:

Tami Creations
Full Absorption income statement For the Quarter ended March 31
Particulars	Details	Amount
Sales		$11,30,000
Cost of Goods Sold:
Cost of goods produced (33250*$25.70)	$8,54,525
Add: Opening Inventory	$0
Less: Ending Inventory (5000*$25.70)	$1,28,500	$7,26,025
Gross Profit		$4,03,975
Variable Selling & Administrative Expenses		$1,93,513
Fixed Selling & Administrative Expenses		$1,85,712
Net Operating Income		$24,750

Solution 1c:

Reconciliation of Net Operating income under absorption costing & Variable Costing - March 31
Particulars	Amount
Net Operating Income - Variable Costing	-$24,750.00
Add : Fixed manufacturing overhead deferred in inventory ($9.9*5000)	$49,500.00
Less: Fixed manufacturing overhead released in inventory	$0.00
Net Operating Income - Absorption Costing	$24,750.00

Solution 3a:

Tami Creations
Contribution margin income statement For the Quarter ended June 30
Particulars	Per unit	Amount
Sales (38250 units)	$40.00	$15,30,000.00
Variable Cost:
Variable Cost of goods sold	$15.80	$6,04,350.00
Variable Selling and Administrative Expenses	$6.85	$2,62,012.50
Contribution	$17.35	$6,63,637.50
Fixed Manufacturing Overhead		$3,29,175.00
Fixed Selling & Administrative Expenses		$1,85,712.00
Net Income		$1,48,750.50

Solution 3b:

Tami Creations
Full Absorption income statement For the Quarter ended Jun 30
Particulars	Details	Amount
Sales (38450 units)	$40.00	$15,30,000.00
Cost of Goods Sold:
Cost of goods produced (33250*$25.70)	$8,54,525
Add: Opening Inventory (5000*$25.70)	$1,28,500
Less: Ending Inventory	$0.00	$9,83,025.00
Gross Profit		$5,46,975.00
Variable Selling & Administrative Expenses	$6.85	$2,62,012.50
Fixed Selling & Administrative Expenses		$1,85,712.00
Net Operating Income		$99,250.50

Solution 3c:

Reconciliation of Net Operating income under absorption costing & Variable Costing - For quarter ended Jun 30
Particulars	Amount
Net Operating Income - Variable Costing	$1,48,750.50
Add : Fixed manufacturing overhead deferred in inventory	$0.00
Less: Fixed manufacturing overhead released in inventory (5000*$9.9)	$49,500.00
Net Operating Income - Absorption Costing	$99,250.50