Question

Problem 7-23 Absorption and Variable Costing; Production Constant, Sales Fluctuate

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 (28,100 units)				$	1,124,000
Variable expenses:
Variable cost of goods sold	$	415,880
Variable selling and administrative		193,890			609,770
Contribution margin					514,230
Fixed expenses:
Fixed manufacturing overhead		297,900
Fixed selling and administrative		238,830			536,730
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	33,100
Units sold	28,100
Variable costs per unit:
Direct materials		$	7.20
Direct labor		$	6.00
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 33,100 units but sold 38,100 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.

Answer 1

Solution 1: (a,b,c)

Computation of Unit Product Cost - Absorption Costing
Particulars	Per unit
Direct material	$7.20
Direct Labor	$6.00
Variable manufacturing overhead	$1.60
Fixed manufacturing overhead ($297900/ 33100)	$9.00
Unit Product Cost	$23.80
Tami Creations
Full Absorption income statement For the Quarter ended March 31
Particulars	Details	Amount
Sales		$11,24,000
Cost of Goods Sold:
Cost of goods produced (33100*$23.80)	$7,87,780
Add: Opening Inventory	$0
Less: Ending Inventory (5000*$23.80)	$1,19,000	$6,68,780
Gross Profit		$4,55,220
Variable Selling & Administrative Expenses		$1,93,890
Fixed Selling & Administrative Expenses		$2,38,830
Net Operating Income		$22,500
Reconciliation of Net Operating income under absorption costing & Variable Costing - March 31
Particulars	Amount
Net Operating Income - Variable Costing	-$22,500.00
Add : Fixed manufacturing overhead deferred in inventory ($9.00*5000)	$45,000.00
Less: Fixed manufacturing overhead released in inventory	$0.00
Net Operating Income - Absorption Costing	$22,500.00

Solution 3: (a,b,c)

Tami Creations
Contribution margin income statement For the Quarter ended June 30
Particulars	Per unit	Amount
Sales (38100 units)	$40.00	$15,24,000
Variable Cost:
Variable Cost of goods sold	$14.80	$5,63,880
Variable Selling and Administrative Expenses	$6.90	$2,62,890
Contribution	$18.30	$6,97,230
Fixed Manufacturing Overhead		$2,97,900
Fixed Selling & Administrative Expenses		$2,38,830
Net Income		$1,60,499
Tami Creations
Full Absorption income statement For the Quarter ended Jun 30
Particulars	Details	Amount
Sales (38100 units)	$40.00	$15,24,000
Cost of Goods Sold:
Cost of goods produced (33100*$23.80)	$7,87,780
Add: Opening Inventory (5000*$23.80)	$1,19,000
Less: Ending Inventory	$0.00	$9,06,780
Gross Profit		$6,17,220
Variable Selling & Administrative Expenses	$6.90	$2,62,890
Fixed Selling & Administrative Expenses		$2,38,830
Net Operating Income		$1,15,499
Reconciliation of Net Operating income under absorption costing & Variable Costing - For quarter ended Jun 30
Particulars	Amount
Net Operating Income - Variable Costing	$1,60,499
Add : Fixed manufacturing overhead deferred in inventory	$0
Less: Fixed manufacturing overhead released in inventory (5000*$9.00)	$45,000
Net Operating Income - Absorption Costing	$1,15,499