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		192,440			659,390
Contribution margin					472,610
Fixed expenses:
Fixed manufacturing overhead		275,440
Fixed selling and administrative		210,370			485,810
Net operating loss				$	( 13,200)

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	31,300
Units sold	28,300
Variable costs per unit:
Direct materials		$	7.50
Direct labor		$	7.10
Variable manufacturing overhead		$	1.90
Variable selling and administrative		$	6.80

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 31,300 units but sold 34,300 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.

Answer 1

1a.	Direct materials	7.50
	Direct labor	7.10
	Variable manufacturing overhead	1.90
	Fixed manufacturing overhead ($275440/31300)	8.80
	Unit product cost $	25.30
b.	Sales (28300 units)	1132000
	Cost of goods sold (28300 x $25.30)	715990
	Gross profit	416010
	Selling and administrative [$210370 + (28300 x $6.80)]	402810
	Net operating income $	13200
c.	Variable costing net operating income (loss) $	-13200
	Add: Fixed manufacturing overhead cost deferred in ending inventory under absorption costing [(31300 - 28300) x $8.80]	26400
	Absorption costing net operating income $	13200
3a.	Sales revenue ($1132000 x 34300/28300)	1372000
	Less: Variable expenses
	Variable cost of goods sold (34300 x $16.50)	565950
	Variable selling and administrative expenses (34300 x $6.80)	233240
	Total variable expenses	799190
	Contribution margin	572810
	Less: Fixed expenses
	Fixed manufacturing overhead	275440
	Fixed selling and administrative expenses	210370
	Total fixed expenses	485810
	Net operating income $	87000
b.	Sales (34300 units)	1372000
	Cost of goods sold (34300 x $25.30)	867790
	Gross profit	504210
	Selling and administrative [$210370 + (34300 x $6.80)]	443610
	Net operating income $	60600
c.	Variable costing net operating income (loss) $	87000
	Add: Fixed manufacturing overhead cost deferred in ending inventory under absorption costing	0
	Less: Fixed manufacturing overhead cost released from beginning inventory (3000 x $8.80)	26400
	Absorption costing net operating income $	60600