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. $ 1,148,000 Tami's Creations, Inc. Income Statement For the Quarter Ended March 31 Sales (28,700 units) Variable expenses: Variable cost of goods sold $ 456,330 Variable selling and administrative 195,160 Contribution margin Fixed expenses: Fixed manufacturing overhead 285,300 Fixed selling and administrative 224,710 Net operating loss 651,490 496,510 510,010 $ ( 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: 31,700 28,700 Units produced Units sold Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative $ 7.40 $ 6.50 $ 2.00 $ 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?

Answer 1

1a). Calculation of Unit cost Under Absorption Costing First Quarter Direct Material Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Over head 285300/33300 Unit Product cost 7.4 6.5 2 9.00 24.90 1B). Income Statement Under Absorption Costing First Quarter Sales (28700*40) Cost of Goods Sold(28700*24.90) Gross Margin Selling and Administrative Overheads Net Operating Income(loss) 1148000 714630 433370 419870 13500

1.C). Reconcile the variable costing and absorption costing Net income First Quarter Variable Costing Net Operating Income Add Fixed Manufacturing Overheads cost Deferred in inventory Absorption Costing Net Operating Income -13,500 27,000 13,500 Working Note -1 First Quarter Units Produced Units Sold Difference in units ( Produces -Sold) Difference in manufacturing overheads = (Difference in units * fixed manufacturing overheads per unit) 31700 28700 3000 27,000

Calculation of Unit cost Under Variable Costing Second Quarter Direct Material Direct Labour Variable Manufacturing Overhead Unit Cost 7.4 6.5 2 15.90 2.A). Income Statement Under Variable Costing Sales (38700*40) Variable Expense Cost of Goods Sold (38700*15.90) Varaible Selling and Adminisatrative Total Varible Expenses Contribution Magin Fixed Expenses Fixed mufacturing Overheads Fixed Sellingand Administrative Expenses Total fixed Expenses Net Operating Income 1388000 551730 235960 787690 600310 285300 224710 510010 90300

Calculation of Unit cost Under Absorption Costing second Quarter Direct Material Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Over head 285300/33300 Unit Product cost 7.4 6.5 9,0 24.9 2B). Income Statement Under Absorption Costing second Quarter Sales Cost of Goods Sold Gross Margin Selling and Administrative Overheads Net Operating Income (loss) 1388000 864030 523970 460670 63300

2C). Reconcile the variable costing and absorption costing Net Variable Costing Net Operating Income Deduct: Fixed Manufacturing Overheads cost 90,300 -27,000 released From inventory Absorption Costing Net Operating Income 63,300 Working Note -1 second Quarter Units Produced Units Sold Difference in units =( Produces -Sold) Difference in manufacturing overheads = (Difference in units * fixed manufacturing overheads per unit) 31700 34700 -3000 -27,000