Question

Problem 6-23 Absorption and Variable Costing; Production Constant, Sales Fluctuate [LO6-1, LO6-2, LO6-3]

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 (28,900 units)				$	1,156,000
Variable expenses:
Variable cost of goods sold	$	488,410
Variable selling and administrative		199,410			687,820
Contribution margin					468,180
Fixed expenses:
Fixed manufacturing overhead		255,200
Fixed selling and administrative		224,980			480,180
Net operating loss				$	( 12,000)

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	31,900
Units sold	28,900
Variable costs per unit:
Direct materials		$	7.60
Direct labor		$	7.70
Variable manufacturing overhead		$	1.60
Variable selling and administrative		$	6.90

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 31,900 units but sold 34,900 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.
Need some large help on any of this if I am being honest!

Answer 1

Under absorption costing, fixed manufacturing overhead is part of product costs while under variable costing only variable manufacturing costs are part of product costs.