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 (28,600 units) $ 1,144,000

Variable expenses:

Variable cost of goods sold $ 420,420

Variable selling and administrative 198,770 619,190 Contribution margin 524,810

Fixed expenses:

Fixed manufacturing overhead 274,920

Fixed selling and administrative 262,940 537,860

Net operating loss $ ( 13,050)

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 31,600

Units sold 28,600

Variable costs per unit:

Direct materials $ 7.20

Direct labor $ 5.70

Variable manufacturing overhead $ 1.80

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 31,600 units but sold 34,600 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

Compute the Ending Inventory
				Q1	Q2
Units of Beginning Year				0	3000
Units produced during the year				31,600	31,600
Units sold during the year				28,600	34,600
Units in ending inventory				3,000	0
Construct The Absorption Costing Unit Product Cost
				Q1	Q2
Direct Material				7.20	7.20
Direct labour				5.70	5.70
Variable Manufacturing overheads				1.80	1.80
Fixed Manufacturing overheads				8.70	8.70
Absorption costing unit prroduct cost				23.40	23.40
Construct the Absorption Costing Income Statement Under FIFO
				Q1	Q2
Sales @$ 40 per unit				$1,144,000	$1,384,000
Cost of Goods sold @23.40				669240	809640		4
Gross Margin				$474,760	$574,360
Selling and distribution expense				461,710	503,410
Net operating income				13,050	70,950
Compute the Variable costing Unit Product cost
				Q1	Q2
Direct Material				7.20	7.20
Direct labour				5.70	5.70
Variable Manufacturing overheads				1.80	1.80
Variable costing unit prroduct cost				14.70	14.70
Construct The Variable Costing Income Statement under FIFO
				Q1		Q2
Sales					1,144,000		1,384,000
Less: Variable cost
variable cost of goods sold				420,420		508,620
Variable selling expense				198,770	619,190	240,470	749,090
Contribution margin					524,810		634,910
Fixed expense:
Fixed Manufacturing overheads					274,920		274,920
Fixed selling expense					262,940		262,940
Net operating Income					-13,050		97,050
Req 1:
A. Unit product cost under Absorption costitng in Q 1: $ 23.40
B. Net operating income under Absorption costing is $ 13050 in Q -1
C. Reconciliation of Income Under Absoroption and Variable costing:
Net income under variable costing:							-13050
Add: Fixed overheads deferred under Absroption costing (3000 units @$8.70)							26100
Net Income under Absorption costing							13050
Req 3:
A. Net Income under Variable cocsting in Q-2: $ 97050
B. Net income under Absroption costing: $ 70950
C. Reconcile
Net income under variable costing:							97050
Less: Fixed overheads released under Absroption costing (3000 units @$8.70)							-26100
Net Income under Absorption costing							70950