Question

ami 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 (28,250 units)				$	1,130,000
Variable expenses:
Variable cost of goods sold	$	435,050
Variable selling and administrative		196,338			631,388
Contribution margin					498,612
Fixed expenses:
Fixed manufacturing overhead		266,000
Fixed selling and administrative		252,612			518,612
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	33,250
Units sold	28,250
Variable costs per unit:
Direct materials		$	7.60
Direct labor		$	5.90
Variable manufacturing overhead		$	1.90
Variable selling and administrative		$	6.95
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 33,250 units but sold 38,250 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

b)	Income Statement (absorption costing)
	Sales			$       1,130,000
Less:	COGS	($ 23.40 x 28250)		$          661,050
	Gross Margin			$          468,950
Less:	Selling and Adm. Expenses:
	Variable	($ 6.95 x 28250)		$          196,338
	Fixed			$          252,612
		Net Income		$            20,000

Workings:
Direct Materials			$      7.60
Direct Labor			$      5.90
Variable manufacturing overhead			$      1.90
Fixed manufacturing overhead			$      8.00	($ 266000 / 33250)
COGS per unit			$   23.40

c)	Reconciliation
	Net income under variable costing				$(20,000.00)
Add:	Fixed manufacturing overhead
	deferred in inventory
	(33250 - 28250) x $ 8				$ 40,000.00
	Net income under absorption costing				$ 20,000.00

3)
a)	Income Statement (Variable Costing)
	Sales			($ 40 x 38250 units)			$ 1,530,000.00
Less:	Variable expenses:
	Variable cost of goods sold			($ 15.4 x 38250 units)		$ 589,050.00
	Variable selling and administrative			($ 6.95 x 38250 units)		$ 265,837.50	$    854,887.50
	Contribution margin						$    675,112.50
	Fixed expenses:
	Fixed manufacturing overhead					$ 266,000.00
	Fixed selling and administrative					$ 252,612.00	$    518,612.00
	Net operating loss						$    156,500.50

b)	Income Statement (Absorption Costing)
	Sales	($ 40 x 38250 units)		$ 1,530,000.00
Less:	COGS	($ 23.40 x 38250)		$    895,050.00
	Gross Margin			$    634,950.00
Less:	Selling and Adm. Expenses:
	Variable	($ 6.95 x 38250)		$    265,837.50
	Fixed			$    252,612.00
				$    116,500.50

Workings:
Direct Materials				$      7.60
Direct Labor				$      5.90
Variable manufacturing overhead				$      1.90
Fixed manufacturing overhead				$      8.00	($ 266000 / 33250)
COGS per unit				$   23.40

c)	Reconciliation
	Net income under variable costing				$ 156,500.50
Add:	Fixed manufacturing overhead
	deferred in inventory
	(33250 - 38250) x $ 8				$ (40,000.00)
	Net income under absorption costing				$ 116,500.50