Question

Problem 6-23 Absorption and Variable Costing; Production Constant, Sales Fluctuate [LO6-1, LO6-2, LO6-3]

Problem 6-23 Absorption and Variable Costing; Production Constant, Sales Fluctuate [LO6-1, LO6-2, LO6-3] 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. $1,120,000 Tami's Creations, Inc. Income Statement For the Quarter Ended March 31 Sales (28,000 units) Variable expenses: Variable cost of goods sold $ 462,000 Variable selling and administrative 168,000 Contribution margin Fixed expenses: Fixed manufacturing overhead 300,000 Fixed selling and administrative 200,000 Net operating loss 630,000 490,000 500,000 (10,000) $ 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: 30,000 28,000 Units produced Units sold Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative $ 3.50 $ 12.00 $ 1.00 $ 6.00
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Answer 1

DATA Opening Inventory Units Produced Units Sold Closing Inventory Selling Price per unit =1120000/28000 Varaible Selling and Adminisatrative Fixed Manufacturing Overheads Fixed Selling and Adminisatrative 30000 28000 2000 40.00 6.00 300000 200000 1a). Calculation of Unit cost Under Absorption Costing First Quarter Direct Material 3.5 Direct Labour 12 Variable Manufacturing Overhead Fixed Manufacturing Over head 300000/30000 10.00 Unit Product cost 26.50 1

1B). Income Statement Under Absorption Costing Sales (28000*40) Cost of Goods Sold(28000*26.50) Gross Margin Selling and Administrative Overheads Net Operating Income(loss) First Quarter 1120000 742000 378000 368000 10000 1.C). Reconcile the variable costing and absorption costing Net income First Quarter Variable Costing Net Operating Income - 10,000 Add Fixed Manufacturing Overheads cost Deferred 20,000 in inventory Absorption Costing Net Operating Income 10,000 Working Note - 1 First Quarter Units Produced 30000 Units Sold 28000 Difference in units =( Produces -Sold) 2000 Difference in manufacturing overheads = 20,000 ( Difference in units * fixed manufacturing loverheads per unit)

DATA 30000 32000 Opening Inventory Units Produced Units Sold Closing Inventory Selling Price per unit Varaible Selling and Adminisatrative Fixed Manufacturing Overheads Fixed Selling and Adminisatrative 40 300000 200000 Calculation of Unit cost Under Variable Costing Second Quarter 12 1280000 Direct Material 3.5 Direct Labour Variable Manufacturing Overhead Unit Cost 16.50 2.A). Income Statement Under Variable Costing Sales (32000*40) Variable Expense Cost of Goods Sold (32000*16.50) 528000 Varaible Selling and Administrative 192000 Total Varible Expenses Contribution Magin Fixed Expenses Fixed mufacturing Overheads 300000 Fixed Sellingand Administrative Expenses 200000 Total fixed Expenses Net Operating Income 720000 560000 500000l 60000

Calculation of Unit cost Under Absorption Costing second Quarter Direct Material Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Over head 300000/30000 10.0 Unit Product cost 26.5 2B). Income Statement Under Absorption Costing Sales (32000*40) Cost of Goods Sold(32000*26.50) Gross Margin Selling and Administrative Overheads Net Operating Income(loss) second Quarter 1280000 848000 432000 392000 40000

2C). Reconcile the variable costing and absorption costing Net Variable Costing Net Operating Income 60,000 Deduct: Fixed Manufacturing Overheads cost -20,000 released from inventory Absorption Costing Net Operating Income 40,000 Working Note-1 w Units Produced Units Sold Difference in units =( Produces -Sold) Difference in manufacturing overheads = (Difference in units * fixed manufacturing overheads per unit) second Quarter 30000 32000 -2000 -20,000