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 (28,400 units)				$	1,136,000
Variable expenses:
Variable cost of goods sold	$	471,440
Variable selling and administrative		195,960			667,400
Contribution margin					468,600
Fixed expenses:
Fixed manufacturing overhead		251,200
Fixed selling and administrative		229,400			480,600
Net operating loss				$	( 12,000)

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	31,400
Units sold	28,400
Variable costs per unit:
Direct materials		$	7.60
Direct labor		$	7.40
Variable manufacturing overhead		$	1.60
Variable selling and administrative		$	6.90

Required:

3. During the second quarter of operations, the company again produced 31,400 units but sold 34,400 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

3)

a)selling price per unit :1136000/28400=$ 40 per unit

variable cost of sales per unit = 7.6 direct material +7.4 direct labor +1.6 variable overhead

                = 16.6

VARIABLE COSTING INCOME STATEMENT
Sales (34400 units)				$	1376000
Variable expenses:
Variable cost of goods sold	$	571040
Variable selling and administrative		237360			808400
Contribution margin					567600
Fixed expenses:
Fixed manufacturing overhead		251,200
Fixed selling and administrative		229,400			480,600
Net operating loss				$	87000

b)

Fixed manufacturing overhead per unit :Total fixed overhead /units produced

=251200/31400=8 per unit

cost of goods sold per unit = variable cost of sales (as computed in a) +fixed overhead

                 = 16.6 +8

                   = 24.60

ABSORPTION COSTING INCOME STATEMENT
Sales	1376000
cost of goods sold (24.6*34400)	846240
Gross margin	529760
selling and administrative expense [(34400*6.9)+229400]	466760
Net operating income	63000

c)

Reconciliation statement
Variable costing net operating income	87000
less:Fixed manufacturing overhead released from beginning inventory (3000*8)	-24000
Absorption costing net operating income	63000