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	$	257,400
Variable selling and administrative expenses		170,500				427,900
Contribution margin						370,700
Fixed expenses:
Fixed manufacturing overhead		205,000
Fixed selling and administrative expenses		221,000				426,000
Net operating loss					$	( 55,300	)

  

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	$	7.30
Direct labor	$	2.70
Variable manufacturing overhead	$	1.70
Variable selling and administrative	$	7.75

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 25,000 units but sold 28,000 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

1. a Answer:- Calculation of absorption costing unit product cost-

Particulars	Amount ($)
Direct Material	$ 7.30
Direct Labour	$2.70
Variable Manufacturing overhead	$1.70
Fixed manufacturing Overhead ($205,000 ÷ 25000)	$8.20
Absorption costing unit product cost	$19.90

b Answer :-

Company's Income statement for the quarter using absorption costing:-

Tami's Creation Inc.,

Income statement for the quarter Ending March 31

Particulars	Amount ($)	Amount ($)
Sales (22000 units × $36.30) -( A)		$798,600
Less:- Cost of goods sold (22000 units × $19.90) - (B)		$437,800
Gross Margin (A +B)		$360,800
Less :- Selling and administrative expenses :
Variable selling and administrative expenses	($170,500)
Fixed selling and administrative expenses	($221,000)
Total of selling and administrative expenses Net loss from operations		($391,500) ($30,700)

C Answer :-

. Reconciliation of Net income or Net loss under Variable and absorption costing

Particulars	Amount ($)
As per variable costing - Net Operating Loss	($55,300)
Add:- Fixed manufacturing Overhead (refer to note 1)
Deferred in Inventory in absorption costing (3000 units × $8.20)	$24,600
As per Absorption costing - Net Operating Loss	$30,700

Note 1:- Fixed Manufacturing Overhead - Calculation of no. Of units - (28000 units - 25000 units ) = 3000 units

3. Answer:- A.

Contribution Format of the Income Statement for the quarter Ending April 30

Tami's Creation Inc.,

Income statement for the quarter Ending April 30

Particulars	Amount ($)	Amount ($)
Sales (28,000 units × $36.30) (A)		$1,016,400
Less:- Variable Expenses (B)
Variable cost of goods sold (28000 units × $ 11.70) note 2	($327,600)
Variable selling and administrative expenses (28000 units X $ 7.75) note 3	($217,000)	($544,600)
Contribution margin (A - B)		$471,800
Less:- Fixed Expenses
Fixed manufacturing Overhead	($205,000)
Fixed selling and administrative expenses	($221,000)	($426,000)
Net Operating Income		$45,800

Note 2:- Calculation of per unit of Variable cost of goods sold = $257,400/22000 units = $11.70 per unit cost

Note 3:- Calculation of per unit cost of Variable selling and administrative expenses = $170,50/22000 units = $7.75 per unit cost

B Answer :-

Income statement for the quarter ended April 30 as per Absorption costing :

Tami's Creations

Income statement for the quarter ended April 30

Particulars	Amount ($)	Amount ($)
Sales (28000 units × $36.30) - (A)		$1,016,400
Less:- Cost of goods sold (28000 units × $19.90) - (B)		($557,200)
Gross Margin (A - B) = C		$459,200
Less:- Selling and administrative expenses: (D)
Variable selling and administrative (28000units × $7.75)	($217,000)
Fixed selling administrative	($221,000)	($438,000)
Net income (E) = (C) - (D)		$21,200

C. Answer:-

Reconciliation of Net Income or Loso under both variable costing and absorption costing

Particulars	Amount ($)
Net income as per variable costing	$45,800
Less:- Fixed manufacturing Overhead
Cost released from inventory under absorption costing (3000 units × $8.20)	($24,600)
Absorption costing Net Operating Income	$21,200