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 (28,900 units)				$	1,156,000
Variable expenses:
Variable cost of goods sold	$	450,840
Variable selling and administrative		202,300			653,140
Contribution margin					502,860
Fixed expenses:
Fixed manufacturing overhead		255,200
Fixed selling and administrative		259,660			514,860
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		$	7.50
Direct labor		$	6.50
Variable manufacturing overhead		$	1.60
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? (Round your intermediate calculations to 2 decimal places.)

	Tami’s Creations, Inc. Absorption Costing Income Statement Total Net operating income (loss)

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. During the second quarter of operations, the company again produced 31,900 units but sold 34,900 units. What is the company’s variable costing net operating income (loss) for the second quarter?

	Tami’s Creations, Inc. Variable Costing Income Statement Net operating income (loss)

b. During the second quarter of operations, the company again produced 31,900 units but sold 34,900 units. What is the company’s absorption costing net operating income (loss) for the second quarter? (Round your intermediate calculations to 2 decimal places.)

	Tami’s Creations, Inc. Absorption Costing Income Statement Total Net operating income (loss)

c. During the second quarter of operations, the company again produced 31,900 units but sold 34,900 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

Answer:

1. Complete the following:

a. Compute the unit product cost under absorption costing.

Unit product cost

23.60

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

Tami's Creations Inc
Income Statement
For the quarter ended March 31
Sales	1156,000
Cost of goods sold	682,040
Gross Margin	473,960
Selling and administrative Expenses	461,960
Net operating income (loss)	12,000

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

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Variable costing loss operating income	-12,000
Add: fixed manufacturing overhead costs deferred in inventory under absorbtion costing	24000
Absorbtion costing net operating income	12,000

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?

Tami's Creations Inc
Variable Costing Income Statement
Sales		1,396,000
Variable Expenses:
Variable cost of goods sold	544,440
Variable selling and administrative	244,300	788,740
Contribution Margin		607,260
Fixed expenses
Fixed manufacturing overhead	255,200
Fixed selling and administrative	259,660	514,860
Net operating income (loss)		92,400

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

Tami's Creations Inc
Absorbtion Costing Income Statement
Sales	1,396,000
Cost of goods sold	823,640
Gross Margin	572,360
Selling and administrative Expenses	503,960
Net operating income (loss)	68,400

c. Reconcile the variable costing and absorption costing net operating incomes (losses) for the second quarter.  

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Variable costing loss operating income	92,400
Add: fixed manufacturing overhead costs deferred in inventory under absorption costing	24000
Absorption costing net operating income	68,400

Calculation:

1.

a.

To calculate the Unit product cost, we need to add the unit cost for Direct materials, Direct labor, Variable manufacturing overhead, Variable selling and administrative and Fixed manufacturing overhead.

Fixed manufacturing overhead = 255200 / 31900 = 7

So, Unit product cost is:

Direct materials	7.5
Direct labor	6.5
Variable manufacturing overhead	1.6
Fixed manufacturing overhead	8
Unit product cost	23.60

b.

To calculate the company’s absorption costing net operating income (loss) for the quarter, we need to prepare the income statement as per absorption costing. So the major difference of that with the variable costing is that we need to show the Cost of goods sold with both the variable and fixed expenses and the fixed andd variable selling and adminstrative expenses are shown together under Selling and administrative Expenses section.

So Sales = 28900 x (1156000/28900) = 1156,000

Cost of goods sold = 28900 x 23.60 = 682040

Then the statement will look like this:

Tami's Creations Inc
Income Statement
For the quarter ended March 31
Sales		1156000
Cost of goods sold		682040
Gross Margin		473960
Selling and administrative Expenses
Variable selling and administrative	202,300
Fixed selling and administrative	259,660	461,960
Net operating income (loss)		12,000

c.

To prepare the reconciliation we need to first find the Fixed manufacturing overhead costs deferred in inventory under absorbtion costing as below:

Units produced - Units sold = 31900 - 28900 = 3000

Opening stock as per absorbtion costing (3000 x 23.60) (a)	70800
Opening stock as per variable costing (3000 x 15.60) (b)	46800
Fixed manufacturing overhead costs deferred in inventory under absorbtion costing (a - b)	24000

So reconciliation will be :

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Variable costing loss operating income	-12,000
Add: fixed manufacturing overhead costs deferred in inventory under absorbtion costing	24000
Absorbtion costing net operating income	12,000

3.

a.

To calculate the company’s variable costing net operating income (loss) for the quarter, we need to prepare the income statement as per variable costing. Here, we need to first show sales and deduct the variable expenses which include the Variable cost of goods sold and Variable selling and administrative to get the Contribution Margin. Then we need to deduct the Fixed expenses.

Here the sale unit = 34900.

So Sales = 34900 x (1156000/28900) = 1396000

Variable cost of goods sold = 34900 x 15.60 = 544,440

Variable selling and administrative = 34900 x 7 = 244,300

Then the statement will look like this:

Tami's Creations Inc
Variable Costing Income Statement
Sales		1,396,000
Variable Expenses:
Variable cost of goods sold	544,440
Variable selling and administrative	244,300	788,740
Contribution Margin		607,260
Fixed expenses
Fixed manufacturing overhead	255,200
Fixed selling and administrative	259,660	514,860
Net operating income (loss)		92,400

b.

To calculate the company’s absorption costing net operating income (loss) for the quarter, we need to prepare the income statement as per absorption costing. So the major difference of that with the variable costing is that we need to show the Cost of goods sold with both the variable and fixed expenses and the fixed andd variable selling and adminstrative expenses are shown together under Selling and administrative Expenses section.

So Sales = 34900 x (1156000/28900) = 1,396,000

Cost of goods sold = 34900 x 23.60 = 823,640

Tami's Creations Inc
Absorbtion Costing Income Statement
Sales		1,396,000
Cost of goods sold		823,640
Gross Margin		572,360
Selling and administrative Expenses
Variable selling and administrative	244,300
Fixed selling and administrative	259,660	503,960
Net operating income (loss)		68,400

c.

To prepare the reconciliation we need to calculate the fixed manufacturing overhead costs deferred in inventory under absorbtion costing.

Units produced - Units sold = 31900 - 34900 = 3000

Opening stock as per absorbtion costing (3000 x 23.60) (a)	70800
Opening stock as per variable costing (3000 x 15.60) (b)	46800
Fixed manufacturing overhead costs deferred in inventory under absorbtion costing (a - b)	24000

So reconciliation will be :

Variable costing loss operating income	92,400
Add: fixed manufacturing overhead costs deferred in inventory under absorbtion costing	24000
Absorbtion costing net operating income	68,400