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 (28,600 units)				$	1,144,000
Variable expenses:
Variable cost of goods sold	$	466,180
Variable selling and administrative		200,200			666,380
Contribution margin					477,620
Fixed expenses:
Fixed manufacturing overhead		284,400
Fixed selling and administrative		206,720			491,120
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	31,600
Units sold	28,600
Variable costs per unit:
Direct materials		$	7.30
Direct labor		$	7.10
Variable manufacturing overhead		$	1.90
Variable selling and administrative		$	7.00

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 31,600 units but sold 34,600 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

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Tami Tyler	Quarter 1	Note
Sales	1,144,000.00	A
Units sold	28,600.00	B
Sell price	40.00	C=A/B
Answer 1 a	Quarter 1
Fixed manufacturing overhead	284,400.00	D
Units produced	31,600.00	E
Fixed manufacturing overhead per unit	9.00	F=D/E
Add:
Direct materials	7.30
Direct labor	7.10
Variable manufacturing overhead	1.90
Unit product cost- Absorption costing	25.30	G
Workings for Answer 1 b	Quarter 1
Units sold	28,600.00	See B
Cost of goods sold	723,580.00	H=G*B
Absorption costing income statement	Quarter 1
Sales	1,144,000.00	See A
Less: Costs of goods sold	723,580.00	See H
Gross profit	420,420.00
Less: Selling and admin costs
Fixed Selling and admin costs	206,720.00	See D
Variable Selling and admin costs	200,200.00	Provided in the question
Absorption costing net Operating Income	13,500.00	I
Workings for Answer 1 c	Quarter 1
Units produced	31,600.00	See E
Units sold	28,600.00	See B
Ending Inventory- units	3,000.00	J=E-B
Answer 1 c	Quarter 1
Operating Income- absorption costing	13,500.00	See I
Less: Operating Income- variable costing	(13,500.00)	Provided in the question
Dollar difference	27,000.00	K
Ending Inventory	3,000.00	See J
Dollar difference per unit	9.00	L=K/J
This difference is fixed manufacturing overhead per unit of $ 9 as calculated in Note F.
Workings for Answer 3 a	Quarter 2
Direct materials	7.30
Direct labor	7.10
Variable manufacturing overhead	1.90
Variable selling and admin per unit	7.00
Variable expense per unit	23.30	M
Units sold	34,600.00	N
Total Variable costs	806,180.00	O=M*N
Sell price	40.00	P
Sales Value	1,384,000.00	Q=N*P
Variable costing income statement	Quarter 2
Sales	1,384,000.00	See Q
Less: Variable costs	806,180.00	See O
Contribution margin	577,820.00
Less: Fixed costs
Fixed manufacturing overhead	284,400.00	Provided in the question
Fixed selling and admin	206,720.00	Provided in the question
Variable costing net Operating Income	86,700.00	R
Workings for Answer 3 b	Quarter 2
Units sold	34,600.00	See N
Absorption costing unit product cost	25.30	See G
Costs of goods sold	875,380.00	S=N*G
Variable Selling and admin per unit	7.00	T
Variable Selling and admin costs	242,200.00	U=N*T
Absorption costing income statement	Quarter 2
Sales	1,384,000.00	See Q
Less: Costs of goods sold	875,380.00	See S
Gross profit	508,620.00
Less: Selling and admin costs
Fixed Selling and admin costs	206,720.00	Provided in the question
Variable Selling and admin costs	242,200.00	See U
Absorption costing net Operating Income	59,700.00	V
Answer 3 c	Quarter 2
Operating Income- absorption costing	59,700.00	See V
Less: Operating Income- variable costing	86,700.00	See R
Dollar difference	(27,000.00)	O
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