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 (28,150 units)				$	1,126,000
Variable expenses:
Variable cost of goods sold	$	425,065
Variable selling and administrative		194,235			619,300
Contribution margin					506,700
Fixed expenses:
Fixed manufacturing overhead		298,350
Fixed selling and administrative		230,850			529,200
Net operating loss				$	( 22,500)

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:

Units produced	33,150
Units sold	28,150
Variable costs per unit:
Direct materials		$	7.30
Direct labor		$	6.20
Variable manufacturing overhead		$	1.60
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 33,150 units but sold 38,150 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

	Unit product cost
	Tami’s Creations, Inc. Absorption Costing Income Statement Sales Cost of goods sold Gross margin 0 Selling and administrative expenses Net operating income (loss)

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Variable costing net operating income (loss) Add: Fixed manufacturing overhead cost released from inventory under absorption costing     Absorption costing net operating income (loss)
Tami’s creations, Inc.
Variable Costing Income Statement
Sales
Variable expenses:
Variable selling and administrative
Variable cost of goods sold
		0
Contribution margin		0
Fixed expenses:
Fixed manufacturing overhead
Fixed selling and administrative
		0
Net operating income (loss)

Tami’s Creations, Inc. Absorption Costing Income Statement Sales Cost of goods sold Gross margin 0 Selling and administrative expenses Net operating income (loss)

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes

Variable costing net operating income (loss)
Less: Fixed manufacturing overhead cost released from inventory under absorption costing
Absorption costing net operating income (loss)

Answer 1

Computation of Unit cost as per Absorption Costing
Variable Cost of cost of Goods Sold (425065/28150)	15.1
Fixed Manufacturing Overhead (298350/33150)	9
Total Unit cost	24.1
Tami Tyler Creation Inc.
Absorption-Costing Income Statement
For First Quarter
Unit sold		28150
Sales		$1,126,000.00
Less: Cost of goods sold @$24.10		$678,415.00
Gross profit		$447,585.00
Less: Operating Expense
Variable S&A Expense	$194,235.00
Fixed S&A Expense	$230,850.00	$425,085.00
Operating income		$22,500.00
Tami Tyler Creation Inc.
Variable-Costing Income Statement
For First Quarter
Sales		$1,126,000.00
Less: Variable Cost
Variable cost of goods sold (15.10*28150)	$425,065.00
Variable S&A Expense	$194,235.00	$619,300.00
Contribution margin		$506,700.00
Less: Fixed Expense
Fixed Manufacturign Overhead	$298,350.00
Fixed S&A Expense	$230,850.00	$529,200.00
Operating income		-$22,500.00
Comparison Analysis
Variable Costing Net Operating Income (loss)	-$22,500.00
Add: Fixed Manufacturing Overhead cost deferred in Invenry Under Absorption Costing(33150-28150)*9	$45,000.00
Operating Income as per Variable costing	$22,500.00
Computation of Unit cost as per Absorption Costing
Variable Cost of cost of Goods Sold	15.1
Fixed Manufacturing Overhead (298350/33150)	9
Total Unit cost	24.1
Tami Tyler Creation Inc.
Absorption-Costing Income Statement
For Second Quarter
Unit sold		38150
Sales @(1126000/28150)		$1,526,000.00
Less: Cost of goods sold @$24.10		$919,415.00
Gross profit		$606,585.00
Less: Operating Expense
Variable S&A Expense @6.90	$263,235.00
Fixed S&A Expense	$230,850.00	$494,085.00
Operating income		$112,500.00
Tami Tyler Creation Inc.
Variable-Costing Income Statement
For Second Quarter
Sales		$1,526,000.00
Less: Variable Cost
Variable cost of goods sold (15.10*38150)	$576,065.00
Variable S&A Expense	$263,235.00	$839,300.00
Contribution margin		$686,700.00
Less: Fixed Expense
Fixed Manufacturign Overhead	$298,350.00
Fixed S&A Expense	$230,850.00	$529,200.00
Operating income		$157,500.00
Comparison Analysis
Variable Costing Net Operating Income (loss)	$157,500.00
Add: Fixed Manufacturing Overhead cost deferred in Invenry Under Absorption Costing(33150-38150)*9	-$45,000.00
Operating Income as per Variable costing	$112,500.00