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	$	266,200
Variable selling and administrative		173,800		440,000
Contribution margin				358,600
Fixed expenses:
Fixed manufacturing overhead		207,500
Fixed selling and administrative		221,000		428,500
Net operating loss			$	( 69,900)

  

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 would probably 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	$	7.40
Direct labor	$	2.70
Variable manufacturing overhead	$	2.00
Variable selling and administrative	$	7.90

  

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