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 (28,300 units)				$	1,132,000
Variable expenses:
Variable cost of goods sold	$	466,950
Variable selling and administrative		196,685			663,635
Contribution margin					468,365
Fixed expenses:
Fixed manufacturing overhead		319,680
Fixed selling and administrative		172,685			492,365
Net operating loss				$	( 24,000)

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	33,300
Units sold	28,300
Variable costs per unit:
Direct materials		$	7.50
Direct labor		$	7.20
Variable manufacturing overhead		$	1.80
Variable selling and administrative		$	6.95

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 33,300 units but sold 38,300 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.

During the second quarter of operations, the company again produced 33,300 units but sold 38,300 units. (Assume no change in total fixed costs.) What is the company’s variable costing net operating income (loss) for the second quarter?

	Tami’s Creations, Inc. Variable Costing Income Statement Sales $1,132,000 Variable expenses: Variable cost of goods sold Variable selling and administrative 0 Contribution margin 1,132,000 Fixed expenses: Fixed manufacturing overhead 319,680 Fixed selling and administrative 172,685 492,365 $639,635

During the second quarter of operations, the company again produced 33,300 units but sold 38,300 units. (Assume no change in total fixed costs.) What is the company’s absorption costing net operating income (loss) for the second quarter? (Round your intermediate calculations to 2 decimal places.)

	Tami’s Creations, Inc. Absorption Costing Income Statement 0 $0

During the second quarter of operations, the company again produced 33,300 units but sold 38,300 units. (Assume no change in total fixed costs.) Reconcile the variable costing and absorption costing net operating incomes (losses) for the second quarter.  (Losses and deductions should be entered as a negative.)

	Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Variable costing net operating income (loss) Absorption costing net operating income (loss)

Answer 1

1-a.
Absorption costing unit product cost is:
Direct materials	7.5
Direct labor	7.2
Variable manufacturing overhead	1.8
Fixed manufacturing overhead ($319,680 / 33,300 units)	9.6
Absorption costing unit product cost	26.1
Ques 2
Sales	1132000
Cost of goods sold(28300*26.10)	738630
Gross Margin	393370
Selling and administrative expenses	369370
(6.95*28300+172685)
Net income as per absorption costing	24000
Ques 3-reconciliation
Variable costing net operating income/(loss)	-24000
Add:fixed manufacturing overhead cost deferred	48000
(33300-28300)*$9.6
Absorption costing net operating income/(loss)	24000
Ques 4
Tami’s Creations, Inc.
Income Statement
For the Quarter Ended March 31
Sales (38,300 units)*$40	1532000
Variable expenses:
Variable cost of goods sold(38300*16.5)	631950
Variable selling and administrative(38300*6.95)	266185
Contribution margin	633865
Fixed expenses:
Fixed manufacturing overhead	319680
Fixed selling and administrative	172685
Net operating lincome	141500
Sales	1532000
Cost of goods sold(38300*26.10)	999630
Gross Margin	532370
Selling and administrative expenses	438870
(6.95*38300+172685)
Net income as per absorption costing	93500
Variable costing net operating income/(loss)	141500
less:fixed manufacturing overhead cost released from inventory under absorption costing	-48000
(5000+33300-38300=0 units)
Absorption costing net operating income/(loss)	93500
note:
1132000/28300=$40
under absorption costing in 2nd quarter unit costs remain same
7.5+7.2+1.8=16.50