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 (28,100 units) $ 1,124,000 Variable expenses: Variable cost of goods sold $ 474,890 Variable selling and administrative 193,890 668,780 Contribution margin 455,220 Fixed expenses: Fixed manufacturing overhead 248,800 Fixed selling and administrative 218,420 467,220 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 31,100 Units sold 28,100 Variable costs per unit: Direct materials $ 7.60 Direct labor $ 7.50 Variable manufacturing overhead $ 1.80 Variable selling and administrative $ 6.90 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 31,100 units but sold 34,100 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 7.60 Direct Labour 7.50 Variable Manufacturing Overhead 1.80 Fixed Manufacturing Over head 248800/31100 8.00 Unit Product cost 24.90 1B). Income Statement Under Absorption Costing Sales (28100*40) Cost of Goods Sold(28100*24.90) Gross Margin Selling and Administrative Overheads Net Operating Income(loss) First Quarter 1124000 699690 424310 412310 12000

1.C). Reconcile the variable costing and absorption costing Net income First Quarter Variable Costing Net Operating Income -12,000 Add Fixed Manufacturing Overheads cost Deferred 24,000 in inventory Absorption Costing Net Operating Income 12,000 Working Note - 1 First Quarter Units Produced 31100 Units Sold 281001 Difference in units =( Produces -Sold) 3000 Difference in manufacturing overheads = 24,000 (Difference in units * fixed manufacturing overheads per unit)

Calculation of Unit cost Under Variable Costing Second Quarter 1364000 Direct Material 7.6 Direct Labour 7.5 Variable Manufacturing Overhead 1.8 Unit Cost 16.90 2.A). Income Statement Under Variable Costing Sales (34100*40) Variable Expense Cost of Goods Sold (34100*16.90) 576290 Varaible Selling and Adminisatrative 235290 Total Varible Expenses Contribution Magin Fixed Expenses Fixed mufacturing Overheads 248800 Fixed Sellingand Administrative Expenses 218420 Total fixed Expenses Net Operating Income 811580 552420 467220 85200

7.6 Calculation of Unit cost Under Absorption Costing second Quarter Direct Material Direct Labour 7.5 Variable Manufacturing Overhead 1.81 Fixed Manufacturing Over head 248800/31100 8.0 Unit Product cost 24.90 2B). Income Statement Under Absorption Costing Sales (34100*40) Cost of Goods Sold(34100*24.90) Gross Margin Selling and Administrative Overheads Net Operating Income(loss) second Quarter 1364000 849090 514910 453710 61200

2C). Reconcile the variable costing and absorption costing Net Variable Costing Net Operating Income 85,200 Deduct: Fixed Manufacturing Overheads cost -24,000 released from inventory Absorption Costing Net Operating Income 61,200 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 31100 34100 -3000 -24,000