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 (28,200 units)				$	1,128,000
Variable expenses:
Variable cost of goods sold	$	459,660
Variable selling and administrative		197,400			657,060
Contribution margin					470,940
Fixed expenses:
Fixed manufacturing overhead		249,600
Fixed selling and administrative		233,340			482,940
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	31,200
Units sold	28,200
Variable costs per unit:
Direct materials		$	7.20
Direct labor		$	7.30
Variable manufacturing overhead		$	1.80
Variable selling and administrative		$	7.00

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 31,200 units but sold 34,200 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

Solution 1a , b and c:

Computation of Unit Product Cost - Absorption Costing
Particulars	Per unit
Direct material	$7.20
Direct Labor	$7.30
Variable manufacturing overhead	$1.80
Fixed manufacturing overhead ($249600/ 31200)	$8.00
Unit Product Cost	$24.30
Tami Creations
Full Absorption income statement For the Quarter ended March 31
Particulars	Details	Amount
Sales		$11,28,000
Cost of Goods Sold:
Cost of goods produced (31200*$24.30)	$7,58,160
Add: Opening Inventory	$0
Less: Ending Inventory (3000*$24.30)	$72,900	$6,85,260
Gross Profit		$4,42,740
Variable Selling & Administrative Expenses		$1,97,400
Fixed Selling & Administrative Expenses		$2,33,340
Net Operating Income		$12,000
Reconciliation of Net Operating income under absorption costing & Variable Costing - March 31
Particulars	Amount
Net Operating Income - Variable Costing	-$12,000.00
Add : Fixed manufacturing overhead deferred in inventory ($8.00*3000)	$24,000.00
Less: Fixed manufacturing overhead released in inventory	$0.00
Net Operating Income - Absorption Costing	$12,000.00

Solution 3a, b and c:

Tami Creations
Contribution margin income statement For the Quarter ended June 30
Particulars	Per unit	Amount
Sales (34200 units)	$40.00	$13,68,000
Variable Cost:
Variable Cost of goods sold	$16.30	$5,57,460
Variable Selling and Administrative Expenses	$7.00	$2,39,400
Contribution	$16.70	$5,71,140
Fixed Manufacturing Overhead		$2,49,600
Fixed Selling & Administrative Expenses		$2,33,340
Net Income		$88,199
Tami Creations
Full Absorption income statement For the Quarter ended Jun 30
Particulars	Details	Amount
Sales (34200 units)	$40.00	$13,68,000.00
Cost of Goods Sold:
Cost of goods produced (31200*$24.30)	$7,58,160
Add: Opening Inventory (3000*$24.30)	$72,900
Less: Ending Inventory	$0.00	$8,31,060
Gross Profit		$5,36,940
Variable Selling & Administrative Expenses	$7.00	$2,39,400
Fixed Selling & Administrative Expenses		$2,33,340
Net Operating Income		$64,199
Reconciliation of Net Operating income under absorption costing & Variable Costing - For quarter ended Jun 30
Particulars	Amount
Net Operating Income - Variable Costing	$88,199
Add : Fixed manufacturing overhead deferred in inventory	$0
Less: Fixed manufacturing overhead released in inventory (3000*$8.00)	$24,000
Net Operating Income - Absorption Costing	$64,199