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 (28,600 units)				$	1,144,000
Variable expenses:
Variable cost of goods sold	$	480,480
Variable selling and administrative		198,770			679,250
Contribution margin					464,750
Fixed expenses:
Fixed manufacturing overhead		284,400
Fixed selling and administrative		193,850			478,250
Net operating loss				$	-13,500

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	31,600
Units sold	28,600
Variable costs per unit:
Direct materials		$	7.6
Direct labor		$	7.6
Variable manufacturing overhead		$	1.6
Variable selling and administrative		$	6.95

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 31,600 units but sold 34,600 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). Calculation of Unit cost Under Absorption Costing First Quarter Direct Material 7.6 Direct Labour Variable Manufacturing Overhead 1.6 Fixed Manufacturing Over head 284400/31600 9.00 Unit Product cost 25.80 1B). Income Statement Under Absorption Costing Sales (28600*40) Cost of Goods Sold(28600*25.80) Gross Margin Selling and Administrative Overheads Net Operating Income(loss) First Quarter 1144000 737880 406120 392620 13500

1.C). Reconcile the variable costing and absorption costing Net income First Quarter Variable Costing Net Operating Income -13,500 Add Fixed Manufacturing Overheads cost Deferred 27,000 in inventory Absorption Costing Net Operating Income 13,500 Working Note - 1 First Quarter Units Produced 31600 Units Sold 28600 Difference in units =( Produces -Sold) 3000 Difference in manufacturing overheads = 27,000 ( Difference in units * fixed manufacturing overheads per unit)

Calculation of Unit cost Under Variable Costing Second Quarter Direct Material Direct Labour Variable Manufacturing Overhead Unit Cost 7.6 7.6 1.6 16.80 2.A). Income Statement Under Variable Costing 1384000 581280 240470 Sales (34600*40) Variable Expense Cost of Goods Sold (34600*16.80) Varaible Selling and Adminisatrative Total Varible Expenses Contribution Magin Fixed Expenses Fixed mufacturing Overheads Fixed Sellingand Administrative Expenses Total fixed Expenses Net Operating Income 821750 562250 284400 193850 478250 84000

Calculation of Unit cost Under Absorption Costing second Quarter Direct Material 7.6 Direct Labour 7.6 Variable Manufacturing Overhead 1.61 Fixed Manufacturing Over head 284400/31600 9.00 Unit Product cost 25.8 2B). Income Statement Under Absorption Costing Sales Cost of Goods Sold Gross Margin Selling and Administrative Overheads Net Operating Income(loss) second Quarter 1384000 892680 4913201 4343201 57000

2C). Reconcile the variable costing and absorption costing Net Variable Costing Net Operating Income 84,000 Deduct: Fixed Manufacturing Overheads cost -27,000 released from inventory Absorption Costing Net Operating Income 57,000 Working Note-1 Units Produced Units Sold Difference in units =( Produces -Sold) Difference in manufacturing overheads = (Difference in units * fixed manufacturing overheads per unit) second Quarter 31600 34600 -3000 -27,000