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 (28,450 units)				$	1,138,000
Variable expenses:
Variable cost of goods sold	$	463,735
Variable selling and administrative		196,305			660,040
Contribution margin					477,960
Fixed expenses:
Fixed manufacturing overhead		267,600
Fixed selling and administrative		230,360			497,960
Net operating loss				$	( 20,000)

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	33,450
Units sold	28,450
Variable costs per unit:
Direct materials		$	7.40
Direct labor		$	6.90
Variable manufacturing overhead		$	2.00
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 33,450 units but sold 38,450 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

1a.

	Quarter 1
Direct Materials	$      2,47,530
Direct Labor	$      2,30,805
Variable Manufacturing Overhead	$          66,900
Fixed Manufacturing Overhead	$      2,67,600
Total manufacturing Cost	$      8,12,835
Units Produced	33450
Product Cost per unit	$            24.30

1b.

	Quarter 1
Sales Revenue	$    11,38,000
Cost of Goods Sold
Beginning Inventory	$                  -
Plus Cost of Goods Manufactured	$      8,12,835
Less Ending Inventory	$      1,21,500
Cost of Goods Sold	$      6,91,335
Gross Margin	$      4,46,665
Variable Selling and administrative	$      1,96,305
Fixed Selling and administrative	$      2,30,360
Operating Income	$          20,000

1c.

	Year 1
Income as per Variable Costing	$        -20,000
Add : Fixed Manufacturing Overhead carried forward	$          40,000
Less : Fixed Manufacturing Overhead released
Income as per Absorption Costing	$          20,000

3a.
VAriable Costing

	Quarter 2
Sales	$       15,38,000
Cost of Goods Sold
Beginning Inventory	$             81,500
Plus Cost of Goods Manufactured	$         5,45,235
Less Ending Inventory	$                     -
Cost of Goods Sold	$         6,26,735
Variable Selling and administrative	$         2,65,305
Contribution Margin	$         6,45,960
Fixed Manufacturing OH	$         2,67,600
Fixed Selling and administrative	$         2,30,360
Operating Income	$         1,48,000

3b. Absorption Costing

	Quarter 2
Sales Revenue	$       15,38,000
Cost of Goods Sold
Beginning Inventory	$         1,21,500
Plus Cost of Goods Manufactured	$         8,12,835
Less Ending Inventory	$                     -
Cost of Goods Sold	$         9,34,335
Gross Margin	$         6,03,665
Variable Selling and administrative	$         2,65,305
Fixed Selling and administrative	$         2,30,360
Operating Income	$         1,08,000

3c.

	Year 2
Income as per Variable Costing	$         1,48,000
Add : Fixed Manufacturing Overhead carried forward	$                     -
Less : Fixed Manufacturing Overhead released	$             40,000
Income as per Absorption Costing	$         1,08,000