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 (24,000 units)			$	871,200
Variable expenses:
Variable cost of goods sold	$	280,800
Variable selling and administrative		190,800		471,600
Contribution margin				399,600
Fixed expenses:
Fixed manufacturing overhead		218,700
Fixed selling and administrative		217,000		435,700
Net operating loss			$	( 36,100)

  

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 would probably 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		27,000
Units sold		24,000
Variable costs per unit:
Direct materials	$	7.20
Direct labor	$	2.70
Variable manufacturing overhead	$	1.80
Variable selling and administrative	$	7.95
Required: 1. Complete the following:    a. Compute the unit product cost under absorption costing. (Round your intermediate and final answers to 2 decimal places.)           b. Redo the company’s income statement for the quarter using absorption costing. (Round your intermediate calculations to 2 decimal places.)                           c. Reconcile the variable and absorption costing net operating income (loss) figures. (Round your intermediate calculations to 2 decimal places.)                   3. During the second quarter of operations, the company again produced 27,000 units but sold 30,000 units. (Assume no change in total fixed costs.)    a. Prepare a contribution format income statement for the quarter using variable costing. (Round your intermediate calculations to 2 decimal places.)           b. Prepare an income statement for the quarter using absorption costing. (Round your intermediate calculations to 2 decimal places.)           c. Reconcile the variable costing and absorption costing net operating incomes. (Round your intermediate calculations to 2 decimal places.)

Answer 1

1. a

Compute unit product cost.

Hence, the unit product cost is $20.4.

Working note: Determine the fixed manufacturing cost per unit.

Part 1. a

Unit product cost is $20.4.

Under absorption costing method, unit product cost is calculated by adding per unit costs of direct materials, direct labor, variable manufacturing overhead and fixed manufacturing overhead. Only variable manufacturing related costs are used for the calculation of manufacturing cost per unit. It is given that direct materials cost per unit is $7.4, direct labor cost per unit is $2.9, and variable manufacturing overhead per unit is $1.9. Fixed manufacturing cost is determined by dividing total manufacturing overhead by number of units produced. Thus, fixed manufacturing cost is $8.2. Hence, unit product cost is determined by adding all the above costs. The value amounts to $20.4.

1.b

Prepare income statement under absorption costing for the quarter.

Working note 1: Determine the cost of goods manufactured.

Working note 2: Determine the ending inventory.

Working note 3: Determine the variable selling and administrative expenses.

Part 1.b

Net loss is -$39,800.

Total sales of the company are $7,98,600. As per absorption costing, first deduct the cost of goods sold to arrive at the contribution margin. Then from contribution margin, deduct selling and administrative expenses to arrive at the net income.

Cost of goods manufactured is determined as follows:

Then, using the below formula, ending inventory is determined:

Further, use the below formula to determine the variable selling and administrative expenses.

Further, cost of goods available for sale is determined by adding beginning inventory and cost of goods manufactured. Cost of goods sold is determined by deducting ending inventory from cost of goods available for sale. Contribution margin is determined by deducting cost of goods sold from sales. Then to determine the net income/loss, deduct total selling and administrative expenses from the contribution margin. Fixed cost is more than contribution margin, so there is a net loss of $39,800.

1.c

Reconcile the variable and absorption costing net operating income.

Working note: Determine the fixed manufacturing overhead costs deferred in ending inventory.

[Part 1.c]

Part 1.c

[Part 1.c]

Part 1.c

Net loss is -$39,800.

Take net operating income using variable costing of the first quarter from the problem given. Then, determine fixed manufacturing overhead costs deferred in ending inventory by multiplying the ending inventory and fixed manufacturing overhead. Ending inventory is determined by finding the difference between units produced and units sold. Fixed manufacturing overhead is taken from the step 1. The determined value can be cross-checked with the step 2 to determine whether income statement is correct or not.

Step 4 of 6

Prepare contribution format income statement for the quarter using variable costing.

Working note 1: Determine the amount of sales.

Working note 2: Determine variable cost per unit.

Working note 3: Determine the beginning inventory.

Beginning inventory is ending inventory of last quarter. It is 3,000 units. So, value of ending inventory is determined as follows:

Working note 4: Determine the cost of goods manufactured.

Working note 5: Determine the variable selling and administrative expenses.

Part 3.a

Net income is $33,400.

Total sales of the company are $10,16,400. Deduct the cost of goods sold to arrive at the contribution margin. Then from contribution margin, deduct selling and administrative expenses to arrive at the net income.

Amount of sales is determined as follows:

Variable cost per unit is determined as follows:

Beginning inventory is determined as follows;

Cost of goods manufactured is determined as follows:

Variable selling and administrative expenses is determined as follows:

Further, cost of goods available for sale is determined by adding beginning inventory and cost of goods manufactured. Cost of goods sold is determined by deducting ending inventory from cost of goods available for sale. Contribution margin is determined by deducting cost of goods sold from sales. Then to determine the net income/loss, deduct total selling and administrative expenses from the contribution margin. Net income is $33,400.

3.b

Prepare income statement for the quarter using absorption costing.

Working note 1: Determine the amount of sales.

Working note 2: Determine the beginning inventory.

Beginning inventory is ending inventory of last quarter. It is 3,000 units. So, value of ending inventory is determined as follows:

Working note 3: Determine the cost of goods manufactured.

Working note 5: Determine the variable selling and administrative expenses.

Part 3.b

Net income is $8,800

Total sales of the company are $10,16,400. Deduct the cost of goods sold to arrive at the contribution margin. Then from contribution margin, deduct selling and administrative expenses to arrive at the net income.

Amount of sales is determined as follows:

Beginning inventory is determined as follows;

Cost of goods manufactured is determined as follows:

Variable selling and administrative expenses is determined as follows:

Further, cost of goods available for sale is determined by adding beginning inventory and cost of goods manufactured. Cost of goods sold is determined by deducting ending inventory from cost of goods available for sale. Contribution margin is determined by deducting cost of goods sold from sales. Then to determine the net income/loss, deduct total selling and administrative expenses from the contribution margin. Net income is $8,800.

Step 6 of 6

Reconcile the variable and absorption costing net operating income.

Working note: Determine the fixed manufacturing overhead costs deferred in ending inventory.

Part 3.c

Net operating income (absorption costing) is $8,800.

Take net operating income using variable costing of the first quarter from the problem given. Then, determine fixed manufacturing overhead costs deferred in ending inventory by multiplying the ending inventory and fixed manufacturing overhead. Ending inventory is determined by finding the difference between units produced and units sold. Fixed manufacturing overhead is taken from the step 1. The determined value can be cross-checked with the step 4 to determine whether income statement is correct or not.

Part 1. a

Unit product cost is $20.4.

Part 1.b

Net loss is -$39,800.

Part 1.c

Net loss is -$39,800.

Part 3.a

Net income is $33,400.

Part 3.b

Net income is $8,800

Part 3.c

Net operating income (absorption costing) is $8,800.