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	$	261,800
Variable selling and administrative		176,000			437,800
Contribution margin					360,800
Fixed expenses:
Fixed manufacturing overhead		210,000
Fixed selling and administrative		216,000			426,000
Net operating loss				$	( 65,200)

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		$	7.20
Direct labor		$	2.70
Variable manufacturing overhead		$	2.00
Variable selling and administrative		$	8.00

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.
Direct materials	$7.20
Direct labor	$2.70
Variable manufacturing overhead	$2.00
Fixed manufacturing overhead($210,000/25000 units)	$8.40
Unit product cost	$20.30
b.
Tami’s Creations, Inc.
Absorbtion Income Statement
For the Quarter Ended March 31
Sales (22,000 units x $36.30)		$798,600.00
Cost of Good Sold
Beginning Inventory	$0.00
Add: cost of goods manufactured (25,000 units × $20.30 per unit)	$507,500.00
Goods available for sale	$507,500.00
Less ending inventory (3,000 units × $20.30 per unit)	$60,900.00	$446,600.00
Gross Margin		$352,000.00
Fixed expenses = $216,000 + $176000		$392,000.00
Net Operating Loss		-$40,000.00
c.
Variable costing net loss	-$65,200.00
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing (3,000 units × $8.40 per unit)	$25,200.00
Absorption costing net operating income	-$40,000.00