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	$	413,070
Variable selling and administrative		192,485			605,555
Contribution margin					518,445
Fixed expenses:
Fixed manufacturing overhead		276,790
Fixed selling and administrative		255,005			531,795
Net operating loss				$	( 13,350)

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		$	5.70
Variable manufacturing overhead		$	1.50
Variable selling and administrative		$	6.85

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.

Answer 1

1a.	Direct materials	7.50
	Direct labor	5.70
	Variable manufacturing overhead	1.50
	Fixed manufacturing overhead ($276790/31100)	8.90
	Unit product cost $	23.60
b.	Sales (28100 units)	1124000
	Cost of goods sold (28100 x $23.60)	663160
	Gross profit	460840
	Selling and administrative [$255005 + (28100 x $6.85)]	447490
	Net operating income $	13350
c.	Variable costing net operating income (loss) $	-13350
	Add: Fixed manufacturing overhead cost deferred in ending inventory under absorption costing [(31100 - 28100) x $8.90]	26700
	Absorption costing net operating income $	13350
3a.	Sales revenue ($1124000 x 34100/28100)	1364000
	Less: Variable expenses
	Variable cost of goods sold (34100 x $14.70)	501270
	Variable selling and administrative expenses (34100 x $6.85)	233585
	Total variable expenses	734855
	Contribution margin	629145
	Less: Fixed expenses
	Fixed manufacturing overhead	276790
	Fixed selling and administrative expenses	255005
	Total fixed expenses	531795
	Net operating income $	97350
b.	Sales (34100 units)	1364000
	Cost of goods sold (34100 x $23.60)	804760
	Gross profit	559240
	Selling and administrative [$255005 + (34100 x $6.85)]	488590
	Net operating income $	70650
c.	Variable costing net operating income (loss) $	97350
	Add: Fixed manufacturing overhead cost deferred in ending inventory under absorption costing	0
	Less: Fixed manufacturing overhead cost released from beginning inventory (3000 x $8.90)	26700
	Absorption costing net operating income $	70650