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	$	285,600
Variable selling and administrative		187,200			472,800
Contribution margin					398,400
Fixed expenses:
Fixed manufacturing overhead		226,800
Fixed selling and administrative		221,000			447,800
Net operating loss				$	( 49,400)

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	27,000
Units sold	24,000
Variable costs per unit:
Direct materials		$	7.40
Direct labor		$	3.00
Variable manufacturing overhead		$	1.50
Variable selling and administrative		$	7.80

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 27,000 units but sold 30,000 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

1a)

Direct materials	$7.4
Direct labor	$3.0
variable manufacturing overhead	$1.5
Fixed manufactuirng overhead	$8.4
Unit product cost per unit	$20.3

b)  

Tami Creations Inc
Income Statement
For the Quarter ended March 31
Sales		$8,71,200
Less:COGS
cost of goods manufactured	$5,48,100
Closing inventory	$60,900
COGS		$4,87,200
Gross profit		$3,84,000
Selling and admin expenses
variable	$1,87,200
fixed	$2,21,000
Total selling and admin expenses		$4,08,200
Net operating loss		-$24,200

c)

Net operating loss under absorption costing	-$24,200
Net operating loss under variable costing	-$49,400
Difference in operating loss	$25,200
Change in inventory	$3,000
Fixe dmanufacturing overhead deferred in inventory	$25,200

3) a

Tami Creations Inc
Income Statement (Variable costing)
For the Quarter ended JUne 30
Sales		$10,80,000
Variable cost of goods sold	$3,57,000
variable selling and admin	$2,34,000	$5,91,000
Contribution margin		$4,89,000
Fixed expenses
Fixed manufacturing overhead	$2,26,800
Fixed Selling and admin expenses	$2,21,000	$4,47,800
Net operating income		$41,200

b)

Tami Creations Inc
Income Statement (absorption costing)
For the Quarter ended JUne 30
Sales		$10,80,000
Less:COGS
Opening inventory	$60,900
cost of goods manufactured	$5,48,100
COGS		$6,09,000
Gross profit		$4,71,000
Selling and admin expenses
variable	$2,34,000
fixed	$2,21,000
Total selling and admin expenses		$4,55,000
Net operating income		$16,000

c) Reconciliation of difference

Net operating income under absorption costing	$16,000
Net operating income under variable costing	$41,200
Difference in operating loss	-$25,200
Change in inventory	$3,000
Fixe dmanufacturing overhead deferred in inventory	$25,200