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 (28,700 units)				$	1,148,000
Variable expenses:
Variable cost of goods sold	$	433,370
Variable selling and administrative		195,160			628,530
Contribution margin					519,470
Fixed expenses:
Fixed manufacturing overhead		285,300
Fixed selling and administrative		247,670			532,970
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	31,700
Units sold	28,700
Variable costs per unit:
Direct materials		$	7.20
Direct labor		$	6.30
Variable manufacturing overhead		$	1.60
Variable selling and administrative		$	6.80

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 31,700 units but sold 34,700 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 7.20 Direct Labour 6.30 Variable Manufacturing Overhead 1.60 Fixed Manufacturing Over head 285300/31700 9.00 Unit Product cost 24.10 overhead 1B). Income Statement Under Absorption Costing Sales (28700*40) Cost of Goods Sold(28700*24.10) Gross Margin Selling and Administrative Overheads Net Operating Income(loss) First Quarter 1148000 691670 456330 442830 13500 1

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 31700 Units Sold 28700 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 1388000 Direct Material 7.2 Direct Labour 6.3 Variable Manufacturing Overhead 1.6 Unit Cost 15.10 3.A). Income Statement Under Variable Costing Sales (34700*40) Variable Expense Cost of Goods Sold (34700*15.10) 523970 Varaible Selling and Adminisatrative 235960 Total Varible Expenses Contribution Magin Fixed Expenses Fixed mufacturing Overheads 285300 Fixed Sellingand Administrative Expenses 247670 Total fixed Expenses Net Operating Income 759930 628070 532970 95100

Calculation of Unit cost Under Absorption Costing second Quarter Direct Material 7.2 Direct Labour 6.3 Variable Manufacturing Overhead 1.6 Fixed Manufacturing Over head 285300/31700 Unit Product cost 24.10 9.01 3B). Income Statement Under Absorption Costing Sales (34700*40) Cost of Goods Sold(34700*24.10) Gross Margin Selling and Administrative Overheads Net Operating Income(loss) second Quarter 1388000 836270 551730 483630 68100

3C). Reconcile the variable costing and absorption costing Net Variable Costing Net Operating Income 95,100 Deduct: Fixed Manufacturing Overheads cost -27,000 released From inventory Absorption Costing Net Operating Income 68,100 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 31700 34700 -3000 -27,000