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 (22,000 units)			$	798,600
Variable expenses:
Variable cost of goods sold	$	277,200
Variable selling and administrative		173,800		451,000
Contribution margin				347,600
Fixed expenses:
Fixed manufacturing overhead		210,000
Fixed selling and administrative		215,000		425,000
Net operating loss			$	( 77,400)

  

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		25,000
Units sold		22,000
Variable costs per unit:
Direct materials	$	7.50
Direct labor	$	3.10
Variable manufacturing overhead	$	2.00
Variable selling and administrative	$	7.90

  

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 25,000 units but sold 28,000 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

1a.	Direct materials	7.50
	Direct labor	3.10
	Variable manufacturing overhead	2.00
	Fixed manufacturing overhead ($210000/25000)	8.40
	Unit product cost $	21.00
b.	Sales (22000 units)	798600
	Cost of goods sold (22000 x $21)	462000
	Gross profit	336600
	Selling and administrative ($173800 + $215000)	388800
	Net operating income (loss) $	-52200
c.	Variable costing net operating income (loss) $	-77400
	Add: Fixed manufacturing overhead cost deferred in ending inventory under absorption costing [(25000 - 22000) x $8.40]	25200
	Absorption costing net operating income (loss) $	-52200
3a.	Sales revenue ($798600 x 28000/22000)	1016400
	Less: Variable expenses
	Variable cost of goods sold (28000 x $12.60)	352800
	Variable selling and administrative expenses (28000 x $7.90)	221200
	Total variable expenses	574000
	Contribution margin	442400
	Less: Fixed expenses
	Fixed manufacturing overhead	210000
	Fixed selling and administrative expenses	215000
	Total fixed expenses	425000
	Net operating income $	17400
b.	Sales (28000 units)	1016400
	Cost of goods sold (28000 x $21)	588000
	Gross profit	428400
	Selling and administrative [$215000 + (28000 x $7.90)]	436200
	Net operating income $	-7800
c.	Variable costing net operating income (loss) $	17400
	Add: Fixed manufacturing overhead cost deferred in ending inventory under absorption costing	0
	Less: Fixed manufacturing overhead cost released from beginning inventory (3000 x $8.40)	25200
	Absorption costing net operating income (loss) $	-7800