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 (28,500 units)				$	1,140,000
Variable expenses:
Variable cost of goods sold	$	481,650
Variable selling and administrative		199,500			681,150
Contribution margin					458,850
Fixed expenses:
Fixed manufacturing overhead		283,500
Fixed selling and administrative		188,850			472,350
Net operating loss				$	( 13,500)

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	31,500
Units sold	28,500
Variable costs per unit:
Direct materials		$	7.40
Direct labor		$	7.80
Variable manufacturing overhead		$	1.70
Variable selling and administrative		$	7.00

Required:

3. During the second quarter of operations, the company again produced 31,500 units but sold 34,500 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

3a)

selling price per unit =1140000/28500=$ 40

Variable manufacturing cost per unit = 7.4 +7.8+ 1.7 = 16.90

Variable costing Income statement for the quarter endingJune 30
sales [34500*40]		1380000
less:variable expense
Variable manufacturing cost [16.9*34500]	583050
Variable selling and administrative [7*34500]	241500
Total variable cost		(824550)
contribution margin		555450
less:Fixed cost
Fixed manufacturing overhead	283500
Fixed selling and administrative	188850	(472350)
Net operating income		83100

b)Fixed manufacturing overhead per unit = 283500/31500=9 per unit

cost of goods sold per unit = variable manufacturing cost per unit +fixed manufacturing overhead per unit

=16.9+9 =25.9

Absorption costing Income statement
sales	1380000
less:cost of goods sold   [25.9*34500]	(893550)
Gross margin	486450
less
selling and administrative [(34500*7)+188850]	(430350)
net operating income	56100

c)

Net operating income as per absorption costing	56100
Add :Fixed manufacturing overhead included in beginning inventory [3000*9]	27000
Income as per variable costing	83100

**Beginning inventory = 31500-28500 = 3000 units