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 (28,100 units) $ 1,124,000 Variable expenses: Variable cost of goods sold $ 438,360 Variable selling and administrative 191,080 629,440 Contribution margin 494,560 Fixed expenses: Fixed manufacturing overhead 279,900 Fixed selling and administrative 228,160 508,060 Net operating loss $ ( 13,500) 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 31,100 Units sold 28,100 Variable costs per unit: Direct materials $ 7.50 Direct labor $ 6.50 Variable manufacturing overhead $ 1.60 Variable selling and administrative $ 6.80 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 31,100 units but sold 34,100 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.

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

Req-1(a)Computation of Unit cost as per Absorption Costing
Variable Cost (7.50+6.50+1.60)	15.6
Fixed Manufacturing Overhead (279900/31100)	9
Total Unit cost	24.6

Req: 1(b)Tami Creation Inc.
Absorption-Costing Income Statement
For the First Year of Operations
Unit sold		28100
Sales		$1,124,000.00
Less: Cost of goods sold @24.60*28100		$691,260.00
Gross profit		$432,740.00
Less: Selling and administrative expenses (28100*6.80)+228160		$419,240.00
Operating income		$13,500.00

Require 1(c )Reconcilliation
Variable Costing Net Operating Income (loss)	-$13,500.00
Add: Fixed Manufacturing Overhead cost deferred in Inventory Under Absorption Costing( 31100-28100)*9	$27,000.00
Operating Income as per Variable costing	$13,500.00

Req 3( a)Tami Creation Inc.
Variable-Costing Income Statement
For the First Year of Operations
Sales		$1,364,000.00
Less: Variable Cost
Variable cost of goods sold (15.60*34100)	$531,960.00
Variable selling expense (6.80*34100)	$231,880.00	$763,840.00
Contribution margin		$600,160.00
Less: Fixed Expense
Fixed Manufacturign Overhead	$279,900.00
Fixed Selling and administrative expenses	$228,160.00	$508,060.00
Operating income		$92,100.00

Req: 3(b)Tami Creation Inc.
Absorption-Costing Income Statement
For the First Year of Operations
Unit sold		34100
Sales @$40		$1,364,000.00
Less: Cost of goods sold @24.60*34100		$838,860.00
Gross profit		$525,140.00
Less: Selling and administrative expenses (34100*6.80)+228160		$460,040.00
Operating income		$65,100.00

Require 3(c )Reconcilliation
Variable Costing Net Operating Income (loss)	$92,100.00
Fixed Manufacturing Overhead cost deferred in Inventory Under Absorption Costing( 31100-34100)*9	-$27,000.00
Operating Income as per Variable costing	$65,100.00