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 (28,100 units)				$	1,124,000
Variable expenses:
Variable cost of goods sold	$	463,650
Variable selling and administrative		195,295			658,945
Contribution margin					465,055
Fixed expenses:
Fixed manufacturing overhead		279,900
Fixed selling and administrative		198,655			478,555
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	31,100
Units sold	28,100
Variable costs per unit:
Direct materials		$	7.60
Direct labor		$	7.00
Variable manufacturing overhead		$	1.90
Variable selling and administrative		$	6.95

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 31,100 units but sold 34,100 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
Direct materials	7.6
Direct labor	7
Variable manufacturing overhead	1.9
Fixed manufacturing overhead	9	=279900/31100
Absorption costing unit product cost	25.5
b
Absorption Costing Income Statement
Sales	1124000
Cost of goods sold	716550	=28100*25.5
Gross margin	407450
Selling and administrative expenses	393950
Net operating income (loss)	13500
c
Variable costing net operating income (loss)	-13500
Add: Fixed manufacturing overhead cost deferred in inventory	27000	=3000*9
Absorption costing net operating income (loss)	13500
3a
Variable Costing Income Statement
Sales		1364000
Variable expenses:
Variable cost of goods sold	562650		=34100*16.5
Variable selling and administrative expense	236995	799645	=34100*6.95
Contribution margin		564355
Fixed expenses:
Fixed manufacturing overhead	279900
Fixed selling and administrative expense	198655	478555
Net operating income (loss)		85800
b
Absorption Costing Income Statement
Sales	1364000
Cost of goods sold	869550		=34100*25.5
Gross margin	494450
Selling and administrative expenses	435650		=198655+(34100*6.95)
Net operating income (loss)	58800
c
Variable costing net operating income (loss)	85800
Deduct:Fixed manufacturing overhead cost released from inventory	-27000		=3000*9
Absorption costing net operating income (loss)	58800