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 (28,400 units)				$	1,136,000
Variable expenses:
Variable cost of goods sold	$	440,200
Variable selling and administrative		195,960			636,160
Contribution margin					499,840
Fixed expenses:
Fixed manufacturing overhead		251,200
Fixed selling and administrative		260,640			511,840
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 produced31,400Units sold28,400Variable costs per unit: Direct materials $7.40Direct labor $6.20Variable manufacturing overhead $1.90Variable selling and administrative $6.90

3. During the second quarter of operations, the company again produced 31,400 units but sold 34,400 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

a.

Tami Creations
Contribution margin income statement For the Quarter ended June 30
Particulars	Per unit	Amount
Sales (34400 units)	$40.00	$13,76,000
Variable Cost:
Variable Cost of goods sold	$15.50	$5,33,200
Variable Selling and Administrative Expenses	$6.90	$2,37,360
Contribution	$17.60	$6,05,440
Fixed Manufacturing Overhead		$2,51,200
Fixed Selling & Administrative Expenses		$2,60,640
Net Income		$93,600

b.

Computation of Unit Product Cost - Absorption Costing
Particulars	Per unit
Direct material	$7.40
Direct Labor	$6.20
Variable manufacturing overhead	$1.90
Fixed manufacturing overhead ($251200/ 31400)	$8.00
Unit Product Cost	$23.50

Tami Creations
Full Absorption income statement For the Quarter ended Jun 30
Particulars	Details	Amount
Sales (34400 units)	$40.00	$13,76,000.00
Cost of Goods Sold:
Cost of goods produced (31400*$23.50)	$7,37,900
Add: Opening Inventory (3000*$23.50)	$70,500
Less: Ending Inventory	$0.00	$8,08,400
Gross Profit		$5,67,600
Variable Selling & Administrative Expenses	$6.90	$2,37,360
Fixed Selling & Administrative Expenses		$2,60,640
Net Operating Income		$69,600

c.

Reconciliation of Net Operating income under absorption costing & Variable Costing - For quarter ended Jun 30
Particulars	Amount
Net Operating Income - Variable Costing	$93,600
Add : Fixed manufacturing overhead deferred in inventory	$0
Less: Fixed manufacturing overhead released in inventory (3000*$8.00)	$24,000
Net Operating Income - Absorption Costing	$69,600