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 (28,300 units)				$	1,132,000
Variable expenses:
Variable cost of goods sold	$	449,970
Variable selling and administrative		189,610			639,580
Contribution margin					492,420
Fixed expenses:
Fixed manufacturing overhead		250,400
Fixed selling and administrative		254,020			504,420
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 produced	31,300
Units sold	28,300
Variable costs per unit:
Direct materials		$	7.20
Direct labor		$	7.00
Variable manufacturing overhead		$	1.70
Variable selling and administrative		$	6.70

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 31,300 units but sold 34,300 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

1. First Quarter
(a) Unit Product Cost under Absorption Costing
Direct materials	$7.20
Direct labor	$7.00
Variable manufacturing overhead	$1.70
Fixed manufacturing overhead	$8.00	=250400/31300
Unit Product Cost	$23.90
(b) Net Operating Income as per Absorption Costing
Sales	$11,32,000
-Cost of Goods sold	-$6,76,370	=28300*23.9
Gross Profit	$4,55,630
Selling Expenses:
Variable selling and administrative	-$1,89,610	=-28300*6.7
Fixed selling and administrative	-$2,54,020
Net Operating Income	$12,000
(c ) Reconciliation
Net Income as per Absorption Costing	$12,000
+Fixed Manufacturing Overhead Operating Inventory	$0
- Fixed Manufacturing Overhead Closing Inventory	-$24,000	=(31300-28300)*8
Net Income as per Variable Costing	-$12,000
2. Second Quarter
(a) Net Income as per Variable Costing
Sales (34,300 units)		$13,72,000	=1132000/28300*34300
Variable expenses:
Variable cost of goods sold	$5,45,370		=34300*(7.2+7+1.7)
Variable selling and administrative	$2,29,810	$7,75,180	=34300*6.7
Contribution margin		$5,96,820
Fixed expenses:
Fixed manufacturing overhead	$2,50,400
Fixed selling and administrative	$2,54,020	$5,04,420
Net operating Income		$92,400
(b) Net Income as per Absorption Costing
Sales	$13,72,000
-Cost of Goods sold	-$8,19,770	=34300*23.9
Gross Profit	$5,52,230
Selling Expenses:
Variable selling and administrative	-$2,29,810	=-34300*6.7
Fixed selling and administrative	-$2,54,020
Net Operating Income	$68,400
(c ) Reconciliation
Net Income as per Absorption Costing	$68,400
+Fixed Manufacturing Overhead Operating Inventory	$24,000	=(31300-28300)*8
- Fixed Manufacturing Overhead Closing Inventory	$0
Net Income as per Variable Costing	$92,400