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	$	285,600
Variable selling and administrative expenses		184,800				470,400
Contribution margin						400,800
Fixed expenses:
Fixed manufacturing overhead		224,100
Fixed selling and administrative expenses		221,000				445,100
Net operating loss					$	( 44,300	)

  

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		27,000
Units sold		24,000
Variable costs per unit:
Direct materials	$	7.20
Direct labor	$	2.80
Variable manufacturing overhead	$	1.90
Variable selling and administrative	$	7.70

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

Solution:

Part 1(a) – Unit Product Cost under absorption costing

Absorption Costing System

- Product Cost refers to the costs used to fabricate/make/produce a product.

- Under Absorption Costing, product cost includes both fixed and variable manufacturing expenses incurred in fabrication of the product or service.

- It includes cost of direct material used, cost of direct labor, consumable supplies used and manufacturing/factory overheads (both variable as well as fixed factory overhead).

- Ending Inventory is valued on Production Cost.

- Product Cost does not include Selling, General and Administrative Expenses.

Unit Product Cost	Absorption Costing
Direct Materials per unit	$7.20
Direct labor per unit	$2.80
Variable manufacturing overhead per unit	$1.90
Allocated Fixed Manufacturing Overhead Per unit ($224,100 / 27,000 Units)	8.30
Unit Product Cost	$20.20

Part 1(b) – Income Statement using absorption costing

Absorption Costing Income Statement
	$$	$$
Sales (24,000 Units)		$871,200
Cost of Goods Sold (24,000 Units x Unit Product Cost $20.20)		$484,800
Gross Profit		$386,400
Selling and administrative expense:
Variable selling and administrative expense (24,000 Units x $7.70)	$184,800
Fixed selling and administrative expense	$221,000
Total Selling and administrative expense		$405,800
Net Operating Income		-$19,400

Part 1(c ) – Reconciliation the variable and absorption costing net operating income

	Year 1
Net Operating Income(loss) as per Variable Costing	($44,300)
Add or (Deduct) the Fixed Manufacturing Overhead cost deferred or released from the Inventory (Since variable cost does not include fixed manufacturing cost in product cost but the absorption costing includes)
Ending Inventory (3,000 Units x $8.30 Overhead per unit)	$24,900
Net Operating Income as per Absorption Costing	($19,400)

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you