Question

In: Accounting

Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the beginning of the year....

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.)

         

Solutions

Expert Solution

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

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