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

1a.

Direct materials	7.20
Direct labor	7.30
Variable manufacturing overhead	1.80
Fixed manufacturing overhead ($249600/31200)	8.00
Unit product cost $	24.30

1b.

Tami's Creations, Inc.
Absorption Costing Income Statement
Sales	1128000
Cost of goods sold (28200 x $24.30)	685260
Gross margin	442740
Selling and administrative expenses ($197400 + $233340)	430740
Net operating income (loss) $	12000

1c.

Reconciliation of Variable Costing and Absorption Costing Net Operating Income
Variable costing net operating income (loss) $	-12000
Add: Fixed manufacturing overhead cost deferred in ending inventory [(31200 - 28200) x $8.00]	24000
Absorption costing net operating income $	12000

3a.

Tami's Creations, Inc.
Variable Costing Income Statement
Sales ($1128000 x 34200/28200)		1368000
Variable expenses:
Variable cost of goods sold ($459660 x 34200/28200)	557460
Variable selling and administrative expense (34200 x $7)	239400
		796860
Contribution margin		571140
Fixed expenses:
Fixed manufacturing overhead	249600
Fixed selling and administrative expense	233340
		482940
Net operating income $		88200

3b.

Tami's Creations, Inc.
Absorption Costing Income Statement
Sales	1368000
Cost of goods sold (34200 x $24.30)	831060
Gross margin	536940
Selling and administrative [(34200 x $7) + $233340]	472740
Net operating income $	64200

3c.

Reconciliation of Variable Costing and Absorption Costing Net Operating Income
Variable costing net operating income	88200
Less: Fixed manufacturing overhead cost released from beginning inventory (3000 x $8.00)	24000
Absorption costing net operating income $	64200