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 (24,000 units)			$	871,200
Variable expenses:
Variable cost of goods sold	$	297,600
Variable selling and administrative		188,400		486,000
Contribution margin				385,200
Fixed expenses:
Fixed manufacturing overhead		216,000
Fixed selling and administrative		218,000		434,000
Net operating loss			$	( 48,800)

  

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 would probably 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		27,000
Units sold		24,000
Variable costs per unit:
Direct materials	$	7.40
Direct labor	$	3.00
Variable manufacturing overhead	$	2.00
Variable selling and administrative	$	7.85

  

Required:

1.	Complete the following:

  

a.	Compute the unit product cost under absorption costing. (Round your intermediate and final answers to 2 decimal places.)

         

b.	Redo the company’s income statement for the quarter using absorption costing. (Round your intermediate calculations to 2 decimal places.)

         

c.	Reconcile the variable and absorption costing net operating income (loss) figures. (Round your intermediate calculations to 2 decimal places.)

         

3.	During the second quarter of operations, the company again produced 27,000 units but sold 30,000 units. (Assume no change in total fixed costs.)

  

a.	Prepare a contribution format income statement for the quarter using variable costing. (Round your intermediate calculations to 2 decimal places.)

         

b.	Prepare an income statement for the quarter using absorption costing. (Round your intermediate calculations to 2 decimal places.)

         

c.	Reconcile the variable costing and absorption costing net operating incomes. (Round your intermediate calculations to 2 decimal places.)

         

Answer 1

Solution 1a:

Computation of Unit Product Cost - Variable Costing
Particulars	Per unit
Unit Product Cost:
Direct material	$7.40
Direct Labor	$3.00
Variable manufacturing overhead	$2.00
Unit product cost	$12.40

Computation of Unit Product Cost - Absorption Costing
Particulars	Per unit
Unit Product Cost:
Direct material	$7.40
Direct Labor	$3.00
Variable manufacturing overhead	$2.00
Fixed manufacturing overhead ($216,000 / 27000)	$8.00
Unit Product Cost	$20.40

solution 1b:

Tami Creations
Full Absorption income statement For the Quarter ended March 31
Particulars	Details	Amount
Sales		$871,200.00
Cost of Goods Sold:
Cost of goods produced (27000*$20.40)	$550,800.00
Add: Opening Inventory	$0.00
Less: Ending Inventory (3000*$20.40)	$61,200.00	$489,600.00
Gross Profit		$381,600.00
Variable Selling & Administrative Expenses		$188,400.00
Fixed Selling & Administrative Expenses		$218,000.00
Net Operating Income		-$24,800.00

Solution 1c:

Reconciliation of Net Operating income under absorption costing & Variable Costing - March 31
Particulars	Amount
Net Operating Income - Variable Costing	-$48,800.00
Add : Fixed manufacturing overhead deferred in inventory ($8*3000)	$24,000.00
Less: Fixed manufacturing overhead released in inventory	$0.00
Net Operating Income - Absorption Costing	-$24,800.00

Solution 3a:

Tami Creations
Contribution margin income statement For the Quarter ended June 30
Particulars	Per unit	Amount
Sales	$36.30	$1,089,000.00
Variable Cost:
Variable manufacturing cost	$12.40	$372,000.00
Variable Selling and Administrative Expenses	$7.85	$235,500.00
Contribution	$16.05	$481,500.00
Fixed Manufacturing Overhead		$216,000.00
Fixed Selling & Administrative Expenses		$218,000.00
Net Income		$47,500.00

solution 3b:

Tami Creations
Full Absorption income statement For the Quarter ended Jun 30
Particulars	Details	Amount
Sales		$1,089,000.00
Cost of Goods Sold:
Cost of goods produced (27000*$20.40)	$550,800.00
Add: Opening Inventory (3000*20.40)	$61,200.00
Less: Ending Inventory	$0.00	$612,000.00
Gross Profit		$477,000.00
Variable Selling & Administrative Expenses		$235,500.00
Fixed Selling & Administrative Expenses		$218,000.00
Net Operating Income		$23,500.00

solution 3c:

Reconciliation of Net Operating income under absorption costing & Variable Costing - For quarter ended Jun 30
Particulars	Amount
Net Operating Income - Variable Costing	$47,500.00
Add : Fixed manufacturing overhead deferred in inventory	$0.00
Less: Fixed manufacturing overhead released in inventory (3000*$8)	$24,000.00
Net Operating Income - Absorption Costing	$23,500.00