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	$	288,000
Variable selling and administrative		186,000			474,000
Contribution margin					397,200
Fixed expenses:
Fixed manufacturing overhead		224,100
Fixed selling and administrative		218,000			442,100
Net operating loss				$	( 44,900)

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 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		$	2.70
Variable manufacturing overhead		$	1.90
Variable selling and administrative		$	7.75

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.

PLEASE EXPLAIN AND BOLD ALL ANSWERS THANK YOU

1A. Compute the unit product cost under absorption costing. (Round your answer to 2 decimal places.)

	Unit product cost

1B...What is the company’s absorption costing net operating income (loss) for the quarter?

Advertising Beginning merchandise inventory Commissions Cost of goods sold Depreciation Direct labor Direct materials Ending merchandise inventory Fixed manufacturing overhead Indirect labor Indirect materials Purchases Sales Selling and administrative expenses Variable manufacturing overhead

	Tami’s Creations, Inc. Absorption Costing Income Statement Total

1C... Reconcile the variable and absorption costing net operating income (loss) figures.  (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)

3A. During the second quarter of operations, the company again produced 27,000 units but sold 30,000 units. What is the company’s variable costing net operating income (loss) for the second quarter?

Administrative expenses Advertising Beginning merchandise inventory Commissions Depreciation Ending merchandise inventory Fixed manufacturing overhead Fixed selling and administrative Indirect labor Indirect materials Purchases Sales Variable cost of goods sold Variable selling and administrative

	Tami’s Creations, Inc. Variable Costing Income Statement

3B... During the second quarter of operations, the company again produced 27,000 units but sold 30,000 units. What is the company’s absorption costing net operating income (loss) for the second quarter?

Advertising Beginning merchandise inventory Commissions Cost of goods sold Depreciation Direct labor Direct materials Ending merchandise inventory Fixed manufacturing overhead Indirect labor Indirect materials Purchases Sales Selling and administrative expenses Variable manufacturing overhead

	Tami’s Creations, Inc. Absorption Costing Income Statement Total

3C... During the second quarter of operations, the company again produced 27,000 units but sold 30,000 units. 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

SOLUTION

(1A) Unit product cost under absorption costing

	Amount ($)
Direct materials	7.40
Direct labor	2.70
Variable manufacturing overhead	1.90
Fixed manufacturing overhead ($224,100 / 27,000 units)	8.30
Absorption costing unit product cost	20.30

(1B) Absorption costing income statement-

	Amount ($)
Sales	871,200
Cost of goods sold (24,000*$20.30)	487,200
Gross margin	384,000
Selling and administrartive expenses[$218,000+(24,000*$7.75)]	404,000
Net operating income / (loss)	(20,000)

(1C)

	Amount ($)
Variable costing net operating income / (Loss)	(44,900)
Add: Fixed manufacturing overhead cost defferd in inventory*	24,900
Absorption costing net operating income / (Loss)	(20,000)

*Units in ending inventory = Units in beginning inventory + Units produced – Units sold

= 0 units + 27,000 units – 24,000 units = 3,000 units

Fixed manufacturing overhead cost deferred in inventory under absorption costing (3,000 units * $8.30 per unit) = $24,900

(3A)

	Amount ($)	Amount ($)
Sales (30,000*$36.30)		1,089,000
Variable expense:
Variable cost of goods sold (30,000*$12)	360,000
Variable selling and administrartive expenses(30,000*$7.75)	232,500	592,500
Contribution margin		496,500
Fixed expenses:
Fixed manufacturing overhead	224,100
Fixed Sellind administrative expense	218,000	442,100
Net operating income		54,400

Selling price per unit = $871,200/24,000 = $36.30

(3B)

Absorption costing income statement-

	Amount ($)
Sales	1,089,000
Cost of goods sold (30,000*$20.30)	609,000
Gross margin	480,000
Selling and administrartive expenses[$218,000+(30,000*$7.75)]	450,500
Net operating income / (loss)	29,500

(3C)

	Amount ($)
Variable costing net operating income / (Loss)	54,400
Deduct: Fixed manufacturing overhead cost defferd in inventory*	(24,900)
Absorption costing net operating income / (Loss)	29,500

*Units in ending inventory = Units in beginning inventory + Units produced – Units sold

= 0 units + 27,000 units – 30,000 units = 0 units

Fixed manufacturing overhead cost deferred in inventory under absorption costing (3,000 units * $8.30 per unit) = $24,900