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	$	470,250
Variable selling and administrative		179,550			649,800
Contribution margin					490,200
Fixed expenses:
Fixed manufacturing overhead		283,500
Fixed selling and administrative		220,200			503,700
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		$	7.50
Variable manufacturing overhead		$	1.60
Variable selling and administrative		$	6.30

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

Solution 1a:
Computation of Unit Product Cost - Absorption Costing
Particulars	Q1	Q2
Unit Product Cost:
Direct material	$7.40	$7.40
Direct Labor	$7.50	$7.50
Variable manufacturing overhead	$1.60	$1.60
Fixed manufacturing overhead ($283,500/31500)	$9.00	$9.00
Unit Product Cost	$25.50	$25.50

Solution 1b:
Tami Creations
Full Absorption income statement For the Quarter ended March 31
Particulars	Details	Amount
Sales		$1,140,000.00
Cost of Goods Sold:
Cost of goods produced (31500*$25.50)	$803,250.00
Add: Opening Inventory	$0.00
Less: Ending Inventory (3000*$25.50)	$76,500.00	$726,750.00
Gross Profit		$413,250.00
Variable Selling & Administrative Expenses		$179,550.00
Fixed Selling & Administrative Expenses		$220,200.00
Net Operating Income		$13,500.00

Solution 1c:
Reconciliation of Net Operating income under absorption costing & Variable Costing - March 31
Particulars	Amount
Net Operating Income - Variable Costing	-$13,500.00
Add : Fixed manufacturing overhead deferred in inventory ($9*3000)	$27,000.00
Less: Fixed manufacturing overhead released in inventory	$0.00
Net Operating Income - Absorption Costing	$13,500.00

Solution 3a:
Computation of Unit Product Cost - Variable Costing
Particulars	Q1	Q2
Unit Product Cost:
Direct material	$7.40	$7.40
Direct Labor	$7.50	$7.50
Variable manufacturing overhead	$1.60	$1.60
Unit product cost	$16.50	$16.50

Tami Creations
Contribution margin income statement For the Quarter ended June 30
Particulars	Per unit	Amount
Sales	$40.00	$1,380,000.00
Variable Cost:
Variable manufacturing cost	$16.50	$569,250.00
Variable Selling and Administrative Expenses	$6.30	$217,350.00
Contribution	$17.20	$593,400.00
Fixed Manufacturing Overhead		$283,500.00
Fixed Selling & Administrative Expenses		$220,200.00
Net Income		$89,700.00

Solution 3b:
Tami Creations
Full Absorption income statement For the Quarter ended Jun 30
Particulars	Details	Amount
Sales		$1,380,000.00
Cost of Goods Sold:
Cost of goods produced (31500*$25.50)	$803,250.00
Add: Opening Inventory (3000*25.50)	$76,500.00
Less: Ending Inventory	$0.00	$879,750.00
Gross Profit		$500,250.00
Variable Selling & Administrative Expenses		$217,350.00
Fixed Selling & Administrative Expenses		$220,200.00
Net Operating Income		$62,700.00

Solution 3c:
Reconciliation of Net Operating income under absorption costing & Variable Costing - For quarter ended Jun 30
Particulars	Amount
Net Operating Income - Variable Costing	$89,700.00
Add : Fixed manufacturing overhead deferred in inventory	$0.00
Less: Fixed manufacturing overhead released in inventory (3000*$9)	$27,000.00
Net Operating Income - Absorption Costing	$62,700.00