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 (29,000 units) $ 1,160,000 Variable expenses: Variable cost of goods sold $ 443,700 Variable selling and administrative 201,550 645,250 Contribution margin 514,750 Fixed expenses: Fixed manufacturing overhead 281,600 Fixed selling and administrative 246,350 527,950 Net operating loss $ ( 13,200) 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 32,000 Units sold 29,000 Variable costs per unit: Direct materials $ 7.50 Direct labor $ 6.00 Variable manufacturing overhead $ 1.80 Variable selling and administrative $ 6.95 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 32,000 units but sold 35,000 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. Tami’s Creations, Inc. Income Statement For the Quarter Ended March 31 Sales (29,000 units) $ 1,160,000

Answer 1

1)

Direct material	7.5
Direct labor	6
variable manufacturing overhead	1.8
Fixed manufacturing overhead [ 281600/32000]	8.8
unit product cost under absorption costing.	24.1

b)

Sales	1160000
less:cost of goods sold [29000*24.1]	(698900)
gross margin	461100
ess:selling and administrative [201550 variable +246350 fixed]	(447900)
absorption costing net operating income (loss)	13200

c)ending inventory = 32000-29000=3000

variable costing net operating income /(loss)	(13200)
Add:fixed manufacturing overhead cost deferred in ending inventory [3000*8.8]	26400
absorption costing net operating income (loss)	13200

2)

selling price= 1160000/29000= 40

variable cost of sales = 7.5 +6+1.8= 15.3

sales [35000*40]	1400000
less:variable expense
variable cost of sales [15.3*35000 ]	(535500)
variable selling and administrative	(243250)
Total variable cos	(778750)
contribution margin	621250
less:fixed manufacturing overhead	(281600)
fixed selling and administrative	(246350)
variable costing net operating income (loss)	93300

b)

sales	1400000
less:cost of goods sold [24.1*35000]	(843500)
Gross margin	556500
selling and administrative [243250 variable +246350 fixed]	(489600)
absorption costing net operating income (loss)	66900

c)

variable costing net operating income (loss)	93300
less:fixed manufacturing overhead cost deferred in ending inventory of last quarter	(26400)
absorption costing net operating income (loss)	66900