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 (28,700 units)				$	1,148,000
Variable expenses:
Variable cost of goods sold	$	430,500
Variable selling and administrative		195,160			625,660
Contribution margin					522,340
Fixed expenses:
Fixed manufacturing overhead		285,300
Fixed selling and administrative		250,540			535,840
Net operating loss				$	( 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:

Units produced	31,700
Units sold	28,700
Variable costs per unit:
Direct materials		$	7.30
Direct labor		$	6.20
Variable manufacturing overhead		$	1.50
Variable selling and administrative		$	6.80

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 31,700 units but sold 34,700 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

Req 1.
Construct The Absorption Costing Unit Product Cost
				Q-1
Direct Material			7.30
Direct labour			6.20
Variable Manufacturing overheads	1.50
Fixed Manufacturing overheads		9.00	(285300/31700)
Absorption costing unit prroduct cost	24.00
Construct the Absorption Costing Income Statement Under FIFO
				Q-1
Sales				$11,48,000
Cost of Goods sold			688800
Gross Margin			$4,59,200
Selling and distribution expense		4,45,700
Net operating income		13,500
Reconciliation Statement
Net Income as per Variable costing	-13500
Add: Fixed OH deferred (3000 units @ 9)	27000
Net Income as per Absorption costing	13500
Req 3.
Construct The Variable Costing Income Statement under FIFO
				Quarter-2
Sales	(1148000/28700*34700)		13,88,000
Less: Variable cost
variable cost of goods sold @15	5,20,500
Variable selling expense		2,35,960	7,56,460
Contribution margin				6,31,540
Fixed expense:
Fixed Manufacturing overheads		2,85,300
Fixed selling expense			2,50,540
Net operating Income			95,700
Construct the Absorption Costing Income Statement Under FIFO
				Q-2
Sales				$13,88,000
Cost of Goods sold			832800
Gross Margin			$5,55,200
Selling and distribution expense		4,86,500
Net operating income		68,700
Reconciliation Statement
Net Income as per Variable costing	95700
Less: Fixed OH released (3000*9)	-27000
Net Income as per Absorption costing	68700