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	$	438,650
Variable selling and administrative		189,610			628,260
Contribution margin					503,740
Fixed expenses:
Fixed manufacturing overhead		250,400
Fixed selling and administrative		265,340			515,740
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		$	7.50
Direct labor		$	6.30
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

1a. Compute the unit product cost under absorption costing.

Direct materials	$7.50
Direct labor	$6.30
Variable manufacturing overhead	1.70
Fixed manufacturing overhead ($250400/31300)	$8
unit product cost	$23.50

1b. What is the company’s absorption costing net operating income (loss) for the quarter?

Sales	$1132000
Cost of Goods sold ($23.50 * 28300)	$665050
Gross Margin	$466950
Selling and administrative expense ($189610 + $265340)	$454950
Net operating Income (Loss)	$12000

(1c) Reconcile the variable and absorption costing net operating income (loss) figures.

Variable costing net operating income (loss)	($12000)
Add: fixed manufacturing overhead cost deferred in inventory	$24000
Absorption costing net operating income	$12000

3a. What is the company’s variable costing net operating income (loss) for the second quarter?

Sales (34300 * $40)		$1372000
Variable expenses:
Variable cost of goods sold [34300 units * ($7.50+$6.30+$1.70)]	$531650
Variable Selling and administrative expense (34300 units * $6.70)	$229810
		$761460
Contribution Margin		$610540
Fixed expenses:
Fixed manufacturing overhead	$250400
Fixed Selling and administrative expense	$265340
		$515740
Net Operating Income		$94800

3b. What is the company’s absorption costing net operating income (loss) for the second quarter?

Sales (34300 * $40)	$1372000
Cost of Goods sold ($23.50 * 34300)	$806050
Gross Margin	$565950
Selling and administrative expense [($6.70 * 34300) + $265340]	$495150
Net operating Income (Loss)	$70800

3c. Reconcile the variable costing and absorption costing net operating incomes for the second quarter

Variable costing net operating income (loss)	$94800
Add: fixed manufacturing overhead cost released from inventory under absorption costing	($24000)
Absorption costing net operating income	$70800