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 $1,132,000 Tami's Creations, Inc. Income Statement For the Quarter Ended March 31 Sales (28,300 units) Variable expenses Variable cost of goods sold $ 438,650 Variable selling and administrative 198, 100 Contribution margin Fixed expenses! Fixed manufacturing overhead 266,400 Fixed selling and administrative Net operating loss 636, 750 495,250 515.250 20,000) $ 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: 33. 300 28,300 $ 7.30 Units produced Unite sold Variable costs per uniti Direct materiale Direct labor Variable manufacturing overhead Variable selling and administrative $1.60

Answer 1

1a). Calculation of Unit cost Under Absorption Costing First Quarter Direct Material Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Over head |266400/33300 Unit Product cost 7.3 6.6 1.6 8.00 23.50 1B). Income Statement Under Absorption Costing First Quarter Sales (28300*40) Cost of Goods Sold (28300*23.50) Gross Margin 1132000 665050 466950 Selling and Administrative Overheads 446950 Net Operating Income(loss) 20000

1.C). Reconcile the variable costing and absorption costing Net income First Quarter Variable Costing Net Operating Income Add Fixed Manufacturing Overheads cost Deferred in inventory Absorption Costing Net Operating Income -20,000 40,000 20,000 Working Note -1 First Quarter Units Produced Units Sold Difference in units =( Produces -Sold) Difference in manufacturing overheads = ( Difference in units * fixed manufacturing overheads per unit) 33300 28300 5000 40,000

Calculation of Unit cost Under Variable Costing Second Quarter Direct Material Direct Labour Variable Manufacturing Overhead 7.3 6,6 1.6 Unit Cost 15.50 2.A). Income Statement Under Variable Costing Sales (38300*40) Variable Expense 1532000 Cost of Goods Sold (38300*15.50) Varaible Selling and Adminisatrative Total Varible Expenses Contribution Magin Fixed Expenses Fixed mufacturing Overheads Fixed Sellingand Administrative Expenses Total fixed Expenses 593650 268100 861750 670250 266400 248850 515250 155000 Net Operating Income

Calculation of Unit cost Under Absorption Costing second Quarter Direct Material Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Over head |266400/33300 Unit Product cost 7.3 6.6 1.6 8.0 23.5 2B). Income Statement Under Absorption Costing second Quarter Sales Cost of Goods Sold Gross Margin 1532000 900050 631950 Selling and Administrative Overheads 516950 Net Operating Income (loss) 115000

2C). Reconcile the variable costing and absorption costing Net Variable Costing Net Operating Income 1,55,000 Deduct: Fixed Manufacturing Overheads cost released From inventory -40,000 Absorption Costing Net Operating Income 1,15,000 Working Note -1 second Quarter- Units Produced Units Sold Difference in units ( Produces -Sold) Difference in manufacturing overheads = 33300 38300 -5000 -40,000 (Difference in units * fixed manufacturing overheads per unit)