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 (28,900 units) $ 1,156,000 Variable expenses: Variable cost of goods sold $ 427,720 Variable selling and administrative 199,410 627,130 Contribution margin 528,870 Fixed expenses: Fixed manufacturing overhead 287,100 Fixed selling and administrative 255,270 542,370 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 31,900 Units sold 28,900 Variable costs per unit: Direct materials $ 7.50 Direct labor $ 5.70 Variable manufacturing overhead $ 1.60 Variable selling and administrative $ 6.90 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 31,900 units but sold 34,900 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

Solution 1:

Computation of Unit Product Cost & Ending Inventory- Absorption Costing
Particulars	Q1	Q2
Unit Product Cost:
Direct Material	$7.50	$7.50
Direct Labor	$5.70	$5.70
Variable manufacturing overhead	$1.60	$1.60
Fixed manufacturing overhead ($287,100 / Nos of unit produced)	$9.00	$9.00
Unit Product Cost	$23.80	$23.80

Income Statement - Absorption Cosing (Quarter 1)
Particulars	Per unit
		Amount
Sales	$40.00	$1,156,000.00
Cost of Goods Sold	$23.80	$687,820.00
Gross Profit		$468,180.00
Variable Selling & Administrative Expenses		$199,410.00
Fixed Selling & Administrative Expenses		$255,270.00
Net Operating Income		$13,500.00

Reconciliation of Net Operating income under absorption costing & Variable Costing (Quarter 1)
Particulars	Q1
Net Operating Income - Variable Costing	-$13,500.00
Add : Fixed manufacturing overhead deferred in inventory ($9 * 3000)	$27,000.00
Net Operating Income - Absorption Costing	$13,500.00

Solution 2:

Income Statement - Variable Cosing (Quarter 2)
Particulars	Per unit
		Amount
Sales	$40.00	$1,396,000.00
Variable Cost of Goods Sold	$14.80	$516,520.00
Variable Selling & Administrative Expenses	$6.90	$240,810.00
Contribution		$638,670.00
Fixed manufacturing overhead		$287,100.00
Fixed Selling & Administrative Expenses		$255,270.00
Net Operating Income		$96,300.00

Income Statement - Absorption Cosing (Quarter 2)
Particulars	Per unit
		Amount
Sales	$40.00	$1,396,000.00
Cost of Goods Sold	$23.80	$830,620.00
Gross Profit		$565,380.00
Variable Selling & Administrative Expenses	$6.90	$240,810.00
Fixed Selling & Administrative Expenses		$255,270.00
Net Operating Income		$69,300.00

Reconciliation of Net Operating income under absorption costing & Variable Costing (Quarter 2)
Particulars	Q2
Net Operating Income - Variable Costing	$96,300.00
Add : Fixed manufacturing overhead deferred in inventory	$0.00
Less: Fixed manufacturing ovehread release in opening inventory	$27,000.00
Net Operating Income - Absorption Costing	$69,300.00