Question

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Chapter 06 Pre-Built Problems Question 5 (of 7) volue: 10.00 points 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 (25,000 units) Variable expenses $ 907,500 Variable cost of goods sold Variable selling and administrative $295,000 197,500 492,500 415,000 Contribution margin Fixed expenses Fixed manufacturing overhead Fixed selling and administrative 224,000 216,000 440,000 Net operating loss $ (25,000) 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 would probably 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 Units sold Variable costs per unit: 28,000 25,000 Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative 7.40 $ 2.70 $ 1.70 $ 7.90

Answer 1

The Absorption Costing Unit Product Cost
Direct Material				7.40
Direct labour				2.70
Variable Manufacturing overheads				1.70
Fixed Manufacturing overheads				8.00
Absorption costing unit product cost				19.80
Construct the Absorption Costing Income Statement
				Quarter 1
Sales				$907,500
Cost of Goods sold				495000
Gross Margin				$412,500
Selling and distribution expense				413,500
Net operating income				-1,000
Reconciliation Statement:
Income Under Variable Costing:				-25000
Add: Fixed OH Deferred (3000 units @8)				24000
Income Under Absroption costing				-1000
Construct The Variable Costing Income Statement under FIFO
				Quarter 2
Sales					1,125,300
Less: Variable cost
variable cost of goods sold				365,800
Variable selling expense				244,900	610,700
Contribution margin					514,600
Fixed expense:
Fixed Manufacturing overheads					224,000
Fixed selling expense					216,000
Net operating Income					74,600
Construct the Absorption Costing Income Statement
				Quarter 2
Sales				$1,125,300
Cost of Goods sold				613800
Gross Margin				$511,500
Selling and distribution expense				460,900
Net operating income				50,600
Reconciliation Statement:
Income Under variable costing					74600
Less: Fixed OH released in beginning Inventory					-24000
Income Under Absorption costing					50600