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 (22,000 units) $ 798,600 Variable expenses: Variable cost of goods sold $ 259,600 Variable selling and administrative 173,800 433,400 Contribution margin 365,200 Fixed expenses: Fixed manufacturing overhead 205,000 Fixed selling and administrative 221,000 426,000 Net operating loss $ ( 60,800) 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 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 25,000 Units sold 22,000 Variable costs per unit: Direct materials $ 7.10 Direct labor $ 2.90 Variable manufacturing overhead $ 1.80 Variable selling and administrative $ 7.90 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 25,000 units but sold 28,000 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

1

A) Under absorption costing, all manufacturing costs, variable and fi xed, are included in              unit product costs:

Direct Materials	$7.10
Direct Labor	$2.90
Variable Manufacturing Overhead	$1.80
Fixed Manufacturing Overhead ($ 205000 : 25000)	$8.20
Absorption costing unit product cost	$20.00

b)

The absorption costing income statements follow

Tami’s Creations, Inc.
Income Statement
For the Quarter Ended March 31
Sales (22,000 unit x $36.3)			$798,600
Cost of goods sold (22,000 x $20)			$440,000
Gross margin			$358,600
Selling and administrative expenses
Variable selling and administrative		$173,800
Fixed selling and administrative		$221,000	$394,800
Net income operations:			($36,200)

C)

The reconciliation of the variable and absorption costing net operating incomes follows

Variable costing loss operating income	($60,800)
Add fixed manufacturing overhead costs deferred
in inventory under absorption costing
(3000 unit x $8.2)	$24,600
Absorption costing net operating income	($36,200)

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3

During the second quarter of operations, the company again produced 25,000 units but sold 28,000 units. (Assume no change in total fixed costs.)

a. What is the company’s variable costing net operating income (loss) for the second quarter?

Variable Costing Unit Product Cost
Direct Material	$7.10
Direct Labor	$2.90
Variable manufacturing overhead	$1.80
Variable Costing Unit Product Cost	$11.80

1. Variable Costing Income Statements

Tami’s Creations, Inc.
Income Statement
For the Quarter Ended April 31
Sales (28,000 units*36.6)			$1,024,800
Variable expenses:
Variable cost of good sold ($11.8x 28000 unit)		$330,400
Variable selling and administrative(28000*7.9)		$221,200	$551,600
Contribution Margin			$473,200
Fixed expenses:
Fixed manufacturing overhead		$205,000
Fixed selling and administrative		$221,000	$426,000
Net operating income			$47,200

b.

What is the company’s absorption costing net operating income (loss) for the second quarter?

Tami’s Creations, Inc.
Income Statement
For the Quarter Ended April 31
Sales (32,000 unit x $40)			$1,024,800
Cost of goods sold
(28,000 unit x $ 20)			$560,000
Gross margin			$464,800
Selling and administrative expenses
Variable selling and administrative		$221,200
(28000 unit x $7.9)
Fixed selling and administrative		$221,000	$442,400
Net income operations:			$22,400

c. Reconcile the variable costing and absorption costing net operating incomes for the second quarte

Variable costing net operating income	$47,200
Deduct fixed manufacturing overhead costs released
from inventory under absorption costing
(3,000 unit x $8.2)	($24,600)
Absorption costing net operating income	$22,600