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	$	436,050
Variable selling and administrative		192,375			628,425
Contribution margin					511,575
Fixed expenses:
Fixed manufacturing overhead		252,000
Fixed selling and administrative		271,575			523,575
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	31,500
Units sold	28,500
Variable costs per unit:
Direct materials		$	7.10
Direct labor		$	6.30
Variable manufacturing overhead		$	1.90
Variable selling and administrative		$	6.75

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 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

1Computation of Unit cost as per Absorption Costing
Variable Cost (7.10+6.30+1.90)	15.3
Fixed Manufacturing Overhead (252000/31500)	8
Total Unit cost	23.3

Req: 1(b)Tami Creation Inc.
Absorption-Costing Income Statement
For the First Year of Operations
Unit sold		28500
Sales @$40		$1,140,000.00
Less: Cost of goods sold @23.30		$664,050.00
Gross profit		$475,950.00
Less: Selling and administrative expenses (28500*6.75)+271575		$463,950.00
Operating income		$12,000.00

Require 1(c )Reconcilliation
Variable Costing Net Operating Income (loss)	-$12,000.00
Add: Fixed Manufacturing Overhead cost deferred in Inventory Under Absorption Costing( 31500-28500)*8	$24,000.00
Operating Income as per Variable costing	$12,000.00

Re 3(b)Tami Creation Inc.
Absorption-Costing Income Statement
For the First Year of Operations
Unit sold		34500
Sales @$40		$1,380,000.00
Less: Cost of goods sold @23.50		$803,850.00
Gross profit		$576,150.00
Less: Selling and administrative expenses (34500*6.75)+271525		$504,450.00
Operating income		$71,700.00
Re 3(a)Tami Creation Inc.
Variable-Costing Income Statement
For the First Year of Operations
Sales @$40		$1,380,000.00
Less: Variable Cost
Variable cost of goods sold (15.30*34500)	$527,850.00
Variable selling expense (6.75*34500)	$232,875.00	$760,725.00
Contribution margin		$619,275.00
Less: Fixed Expense
Fixed Manufacturign Overhead	$252,000.00
Fixed Selling and administrative expenses	$271,575.00	$523,575.00
Operating income		$95,700.00
Re 3( c)Reconcilliation
Variable Costing Net Operating Income (loss)	$95,700.00
Less: Fixed Manufacturing Overhead cost deferred in Inventory Under Absorption Costing( 31600-34600)*8	$24,000.00
Operating Income as per Absorption costing	$71,700.00