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. $ 1,124,000 Tami's Creations, Inc. Income Statement For the Quarter Ended March 31 Sales (28,100 units) Variable expenses: Variable cost of goods sold $ 458,030 Variable selling and administrative 191,080 Contribution margin Fixed expenses: Fixed manufacturing overhead 279,900 Fixed selling and administrative 208,490 Net operating loss 649, 110 474,890 488,390 ( 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:

Answer 1

Solution 1a, b and c:

Computation of Unit Product Cost - Absorption Costing Particulars Per unit Direct material Direct Labor Variable manufacturing overhead Fixed manufacturing overhead ($279900/ 31100) $7.20 $7.60 $1.50 $9.00 10 11 Unit Product Cost $25.30 12 13 Tami Creations Full Absorption income statement For the Quarter ended March 31 Particulars Details Sales Cost of Goods Sold: Cost of goods produced (31100*$25.30) $786,830 Add: Opening Inventory $0 Amount $1,124,000 Less: Ending Inventory (3000*$25.30) $75,900 $ 710,9301 22 23 Gross Profit Variable Selling & Administrative Expenses Fixed Selling & Administrative Expenses $413,070 $191,080 $208,490 25 Net Operating Income $13,500 Reconciliation of Net Operating income under absorption costing & Variable Costing - March 31 Particulars Amount Net Operating Income - Variable Costing $13,500.00 Add : Fixed manufacturing overhead deferred in inventory ($9.00*3000) $27,000.00 Less: Fixed manufacturing overhead released in inventory $0.00 Net Operating Income - Absorption Costing $13,500.00 37 38 20 -208 (2) Sheet331 Sheet202 (3) Sheet333 Sheet153 (34)

Solution 3a, b and c:

Tami Creations Contribution margin income statement For the Quarter ended June 30 Per unit $40.00 Particulars Sales (34100 units) Amount $1,364,000 l Variable Cost: Variable Cost of goods sold Variable Selling and Administrative Expenses $16.30 $6.80 $555,830 $231,880 12 $16.90 Contribution Fixed Manufacturing Overhead $576,290 $279,900 Fixed Selling & Administrative Expenses $208,490 Net Income $87,900 18 19 20 Tami Creations Full Absorption income statement For the Quarter ended Jun 30 Particulars Details Sales (34100 units) $40.00 Cost of Goods Sold: Cost of goods produced (31100*$25.30) $786,830 Add: Opening Inventory (3000*$25.30) $75,900 Less: Ending Inventory $0.00 Amount $1,364,000.00 23 25 26 27 $862,730 Gross Profit $501,270 $6.80 Variable Selling & Administrative Expenses Fixed Selling & Administrative Expenses $231,880 $208,490 Net Operating Income $60,900 Reconciliation of Net Operating income under absorption costing & Variable Costing - For quarter ended Jun 30 Amount $87,900 Particulars Net Operating Income - Variable Costing Add : Fixed manufacturing overhead deferred in inventory Less: Fixed manufacturing overhead released in inventory (3000*$9.00) Net Operating Income - Absorption Costing $0 $27,000 $60,900 43 -208 (2) Sheet331 Sheet202 (3) Sheet333 Sheet153 (34)