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 (28,450 units)				$	1,138,000
Variable expenses:
Variable cost of goods sold	$	432,440
Variable selling and administrative		199,150			631,590
Contribution margin					506,410
Fixed expenses:
Fixed manufacturing overhead		267,600
Fixed selling and administrative		258,810			526,410
Net operating loss				$	( 20,000)

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	33,450
Units sold	28,450
Variable costs per unit:
Direct materials		$	7.20
Direct labor		$	6.00
Variable manufacturing overhead		$	2.00
Variable selling and administrative		$	7.00

Required:

(I already correctly answered the other questions, and I just need help with part 3C)

1. Complete the following:

a. Compute the unit product cost under absorption costing.

	Unit product cost $23.20

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

	Tami’s Creations, Inc. Absorption Costing Income Statement Sales $1,138,000 Cost of goods sold 660,040 Gross margin 477,960 Selling and administrative expenses 457,960 Net operating income (loss) $20,000

c. Reconcile the variable and absorption costing net operating income (loss) figures.b. What is the company’s absorption costing net operating income (loss) for the quarter?

	Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Variable costing net operating income (loss) $(20,000) Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing $40,000 Absorption costing net operating income (loss) $20,000

3. During the second quarter of operations, the company again produced 33,450 units but sold 38,450 units. (Assume no change in total fixed costs.)

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

During the second quarter of operations, the company again produced 33,450 units but sold 38,450 units. (Assume no change in total fixed costs.) What is the company’s variable costing net operating income (loss) for the second quarter?

	Tami’s Creations, Inc. Variable Costing Income Statement Sales $1,538,000 Variable expenses: Variable cost of goods sold 584,440 Variable selling and administrative 269,150 853,590 Contribution margin 684,410 Fixed expenses: Fixed manufacturing overhead 267,600 Fixed selling and administrative 258,810 526,410 Net operating income (loss) $158,000

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

During the second quarter of operations, the company again produced 33,450 units but sold 38,450 units. (Assume no change in total fixed costs.) What is the company’s absorption costing net operating income (loss) for the second quarter?

	Tami’s Creations, Inc. Absorption Costing Income Statement Sales $1,538,000 Cost of goods sold (892,040) Gross margin 645,960 Selling and administrative expenses (527,960) Net operating income (loss) $118,000

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

During the second quarter of operations, the company again produced 33,450 units but sold 38,450 units. (Assume no change in total fixed costs.) 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 net operating income (loss) ? Less: Fixed manufacturing overhead cost released from inventory under absorption costing ? Absorption costing net operating income (loss) $118,000

Answer 1

Construct The Absorption Costing Unit Product Cost
				Q-1
Direct Material			7.20
Direct labour			6.00
Variable Manufacturing overheads	2.00
Fixed Manufacturing overheads		8.00
Absorption costing unit prroduct cost	23.20
Construct the Absorption Costing Income Statement Under FIFO
				Q-1
Sales				$11,38,000
Cost of Goods sold			660040
Gross Margin			$4,77,960
Selling and distribution expense		4,57,960
Net operating income		20,000
Reconciliation Statement
Net Income as per Variable costing		-20000
Add: Fixed Mfg Oh deferred in ending inventory (5000*8)	40000
Net Income as per Absorption costing		20000
Req 2.
Compute the Variable costing Unit Product cost
				Q-2
Direct Material			7.20
Direct labour			6.00
Variable Manufacturing overheads	2.00
Variable costing unit prroduct cost	15.20
Construct The Variable Costing Income Statement under FIFO
				Q-2
Sales				15,38,000
Less: Variable cost
variable cost of goods sold		584440
Variable selling expense		2,69,150
Total Variable cost			8,53,590
Contribution margin			6,84,410
Fixed expense:
Fixed Manufacturing overheads	2,67,600
Fixed selling expense		2,58,810
Total Fixed cost			5,26,410
Net operating Income		1,58,000
Construct the Absorption Costing Income Statement Under FIFO
				Q-2
Sales				$15,38,000
Cost of Goods sold			892040
Gross Margin			$6,45,960
Selling and distribution expense		5,27,960
Net operating income		1,18,000
Reconciliation Statement
Net Income as per Variable costing		158000
Less: Fixed Mfg oh released in Beginning inventory	-40000
Net Income as per Absorption costing		118000