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. $ 1,136,000 Tami's Creations, Inc. Income Statement For the Quarter Ended March 31 Sales (28,400 units) Variable expenses: Variable cost of goods sold $ 485,640 Variable selling and administrative 193,120 Contribution margin Fixed expenses: Fixed manufacturing overhead 282,600 Fixed selling and administrative 188, 140 Net operating loss 678,760 457,240 470, 740 ( 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

1a). Calculation of Unit cost Under Absorption Costing First Quarter Direct Material 7.60 Direct Labour 8.00 Variable Manufacturing Overhead 1.50 Fixed Manufacturing Over head 282600/31400 9.00 Unit Product cost 26.10 1B). Income Statement Under Absorption Costing Sales (28400*40) Cost of Goods Sold(28400*26.10) Gross Margin Selling and Administrative Overheads Net Operating Income(loss) First Quarter 1136000 741240 394760 381260 13500

1.C). Reconcile the variable costing and absorption costing Net income First Quarter Variable Costing Net Operating Income - 13,500 Add Fixed Manufacturing Overheads cost Deferred 27,000 in inventory Absorption Costing Net Operating Income 13,500 Working Note-1 First Quarter Units Produced 31400 Units Sold 28400 Difference in units =( Produces -Sold) 3000 Difference in manufacturing overheads = 27,000 (Difference in units * fixed manufacturing overheads per unit)

Calculation of Unit cost Under Variable Costing Second Quarter 1376000 Direct Material 7.6 Direct Labour Variable Manufacturing Overhead 1.5 Unit Cost 17.10 2.A). Income Statement Under Variable Costing Sales (34400*40) Variable Expense Cost of Goods Sold (34400*17.10) 588240 Varaible Selling and Adminisatrative 233920 Total Varible Expenses Contribution Magin Fixed Expenses Fixed mufacturing Overheads 282600 Fixed Sellingand Administrative Expenses 188140 Total fixed Expenses Net Operating Income 822160 553840 470740 83100

Calculation of Unit cost Under Absorption Costing second Quarter Direct Material 7.6 Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Over head 282600/31400 9.0 Unit Product cost 26.10 2B). Income Statement Under Absorption Costing Sales (34400*40) Cost of Goods Sold(34400*26.10) Gross Margin Selling and Administrative Overheads Net Operating Income(loss) second Quarter 1376000 897840 478160 422060 56100

2C). Reconcile the variable costing and absorption costing Net Variable Costing Net Operating Income 83,100 Deduct: Fixed Manufacturing Overheads cost -27,000 released from inventory Absorption Costing Net Operating Income 56,100 Working Note -1 Units Produced Units Sold Difference in units =( Produces -Sold) Difference in manufacturing overheads = ( Difference in units * fixed manufacturing overheads per unit) second Quarter 31400 34400 -3000 -27,000