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	$	490,100
Variable selling and administrative		197,200			687,300
Contribution margin					472,700
Fixed expenses:
Fixed manufacturing overhead		256,000
Fixed selling and administrative		228,700			484,700
Net operating loss				$	( 12,000)

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	32,000
Units sold	29,000
Variable costs per unit:
Direct materials		$	7.40
Direct labor		$	7.60
Variable manufacturing overhead		$	1.90
Variable selling and administrative		$	6.80

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

Solution:

1
a	Calculation of Unit Product Cost	Amount	Amount
	Variable Expenses
	Variable cost of goods sold	490,100
	Variable selling and administrative	197,200	687,300
	Fixed Expenses
	Fixed Manufacturing Overhead	256,000
	Fixed Selling and Administrative	228,700	484,700
	Total cost per unit		1,172,000
	Total units produced		32,000
	Cost per unit = Total cost/Total units produced		36.63
b	Calculation of Net Income(loss)	Amount
	Sales (29,000 units)	1,160,000
	Less: Total Expenses (29,000*36.63)	1,062,270
	Net Income (Loss)	97,730
c	Net Income (Loss) as per absorption costing	97,730
	Less: Cost of remaining units ((32,000-29,000)*36.63)	109,890
	Net Income (Loss) as per variable costing	(12,160)
	Note: The difference of 160 in the figure of Net Income (Loss) as per variable costing is due to approximation of rate per unit.
2
a	Calculation of Net Income(loss) for second quarter as per variable costing	Amount	Amount
	Sales (1,160,000/29,000 *35,000)		1,400,000
	Variable Expenses:
	Variable cost of goods sold (490,100/29,000 *35,000)	591,500
	Variabble selling and administrative (197,200/29,000 *35,000)	238,000	829,500
	Fixed Expenses:
	Fixed Manufacturing Overhead	256,000
	Fixed Selling and Administrative	228,700	484,700
	Net Income (Loss) as per variable costing (Sales- Variable expenses - Fixed Expenses)		85,800
b	Calculation of Net Income(loss) for second quarter as per absorption costing	Amount
	Sales (1,160,000/29,000 *35,000)	1,400,000
	Less: Total Expenses ( 35,000*41.07)	1,437,450
	Net Income (Loss) as per variable costing (Sales- Total Expenses)	(37,450)
	WN 1: Calculation of new cost per unit as per absorption costing
	Total Cost/ Total Units Produced
	Total Cost = Variable + Fixed = 829,500 + 484,700 = 1,314,200	(cost as calculated in 2a above)
	Total units produced in quarter 2 = 32,000
	Cost per unit = 1,314,200/32,000 = 41.07
c	Net Income (Loss) as per absorption costing	(37,450)
	Less: Cost of remaining units ((32,000-35,000)*41.07)	123,210
	Net Income (Loss) as per variable costing	85,760