Question

Problem 6-23 Absorption and Variable Costing; Production Constant, Sales Fluctuate [LO6-1, LO6-2, LO6-3] 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. $ 1, 136,000 Tami's Creations, Inc. Income Statement For the Quarter Ended March 31 Sales (28,400 units) Variable expenses: Variable cost of goods sold $ 465,760 Variable selling and administrative 190, 280 Contribution margin Fixed expenses: Fixed manufacturing overhead 251,200 Fixed selling and administrative 240,760 Net operating loss 656, 040 479,960 491,960 $ ( 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: 31,400 28, 400 Units produced Units sold Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative $ 7.30 $ 7.10 $ 2.00 $ 6.70

Answer 1

Answer with working notes is given below

a Product Cost Direct Material Direct Labor Variable manufacturing Overhead Fixed manufacturing cost ($251,200/31,400 units) Total Product Cost per unit Absorption Costing $7.30 $7.10 $2.00 $8.00 $24.40 Tami's Creations Inc. Income Statement-Absorption Costing Production units Sales Closing stock Selling price per unit 31,400 28,400 3,000 $40 $1,136,000 Sales Less: Cost of Goods Sold Direct Material Direct Labor Variable Overhead Fixed Manufacturing overhead Cost of Goods available for Sale Less : Closing Stock- (3,000 X $24.40) Cost of Goods Sold $229,220 $222,940 $62,800 $251,200 $766,160 $73,200 $692,960 $443,040 Gross Profit $431,040 (28,400*$6.70)+$240,760 Less: Operating expenses Selling and administrative expenses (Variable + Fixed) Operating Income $12,000 $12,000 Reconciliation of profit Profit as per Absorption Costing Less: Difference in closing stock Closing stock as per Absorption costing Closing stock as per Variable costing Difference $73,200 $49,200 (3,000 * $16.40) $24,000 Loss as per Variable costing -$12,000 Working notes: Product Cost Direct Material Direct Labor Variable manufacturing Overhead Fixed manufacturing cost ($251,200/31,400 units) Total Product Cost per unit Variable Costing $7.30 $7.10 $2.00 Absorption Costing $7.30 $7.10 $2.00 $8.00 $24.40 $16.40 Tami's Creations Inc. Income Statement- Variable Costing (Second Quarter) Opening Stock Production Sales Closing stock Selling price per unit 3,000 31,400 34,400 $40 $1,376,000 $49,200 $229,220 $222,940 $62,800 $564,160 Sales Less : Variable Cost of Goods Sold Opening Stock of Finished Goods (3,000*$16.40) Direct Material Direct Labor Variable Overhead Cost of Goods available for Sale Less : Closing Stock Variable Cost of Goods Sold Variable Selling and administrating expense Contribution Margin Less: Fixed Cost Fixed Manufacturing Overhead Selling and administrative expenses Operating Income $564,160 $230,480|(34,400*$6.70) $581,360 $251,200 $240,760 $491,960 $89,400 Tami's Creations Inc. Income Statement-Absorption Costing (Second Quarter) Opening Stock Production Sales Closing stock Selling price per unit 3,000 31,400 34,400 $40 $1,376,000 Sales Less: Cost of Goods Sold Opening Stock of Finished Goods Direct Material Direct Labor Variable Overhead Fixed Manufacturing overhead Cost of Goods available for Sale Less : Closing Stock Cost of Goods Sold Gross Profit Less: Operating expenses Selling and administrative expenses (Variable + Fixed) Operating Income $73,200 $229,220 $222,940 $62,800 $251,200 $839,360 $839,360 $536,640 $471,240|(34,400*$6.70)+$240,760 $65,400 $65,400 c Reconciliation of profit Profit as per Absorption Costing Add: Difference in Opening stock Opening stock as per Absorption costing Opening stock as per Variable costing Difference $73,200 $49,200 $24,000 Profit as per Variable costing $89,400