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 (28,000 units)				$	1,120,000
Variable expenses:
Variable cost of goods sold	$	436,800
Variable selling and administrative		196,000			632,800
Contribution margin					487,200
Fixed expenses:
Fixed manufacturing overhead		279,000
Fixed selling and administrative		221,700			500,700
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	31,000
Units sold	28,000
Variable costs per unit:
Direct materials		$	7.50
Direct labor		$	6.40
Variable manufacturing overhead		$	1.70
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 31,000 units but sold 34,000 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

1a.	Direct materials	7.50
	Direct labor	6.40
	Variable manufacturing overhead	1.70
	Fixed manufacturing overhead ($279000/31000)	9.00
	Unit product cost $	24.60
b.	Sales (28000 units)	1120000
	Cost of goods sold (28000 x $24.60)	688800
	Gross profit	431200
	Selling and administrative [$221700 + (28000 x $7.00)]	417700
	Net operating income $	13500
c.	Variable costing net operating income (loss) $	-13500
	Add: Fixed manufacturing overhead cost deferred in ending inventory under absorption costing [(31000 - 28000) x $9.00]	27000
	Absorption costing net operating income $	13500
3a.	Sales revenue ($1120000 x 34000/28000)	1360000
	Less: Variable expenses
	Variable cost of goods sold ($436800 x 34000/28000)	530400
	Variable selling and administrative expenses (34000 x $7.00)	238000
	Total variable expenses	768400
	Contribution margin	591600
	Less: Fixed expenses
	Fixed manufacturing overhead	279000
	Fixed selling and administrative expenses	221700
	Total fixed expenses	500700
	Net operating income $	90900
b.	Sales (34000 units)	1360000
	Cost of goods sold (34000 x $24.60)	836400
	Gross profit	523600
	Selling and administrative [$221700 + (34000 x $7.00)]	459700
	Net operating income $	63900
c.	Variable costing net operating income (loss) $	90900
	Add: Fixed manufacturing overhead cost deferred in ending inventory under absorption costing	0
	Less: Fixed manufacturing overhead cost released from beginning inventory (3000 x $9.00)	27000
	Absorption costing net operating income $	63900