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 (28,350 units)				$	1,134,000
Variable expenses:
Variable cost of goods sold	$	476,280
Variable selling and administrative		192,780			669,060
Contribution margin					464,940
Fixed expenses:
Fixed manufacturing overhead		266,800
Fixed selling and administrative		218,140			484,940
Net operating loss				$	( 20,000)

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:

Units produced	33,350
Units sold	28,350
Variable costs per unit:
Direct materials		$	7.20
Direct labor		$	7.70
Variable manufacturing overhead		$	1.90
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 33,350 units but sold 38,350 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

la). Calculation of Unit cost Under Absorption Costing First Quarter Direct Material 7.20 Direct Labour 7.70 Variable Manufacturing Overhead 1.90 Fixed Manufacturing Over head 266800/33350 8.00 Unit Product cost 24.80 1B). Income Statement Under Absorption Costing Sales (28350*40) Cost of Goods Sold(28350*24.80) Gross Margin Selling and Administrative Overheads Net Operating Income(loss) First Quarter 1134000 703080 430920 410920 20000

1.C). Reconcile the variable costing and absorption costing Net income First Quarter Variable Costing Net Operating Income -20,000 Add Fixed Manufacturing Overheads cost Deferred 40,000 in inventory Absorption Costing Net Operating Income 20,000 Working Note-1 First Quarter Units Produced 33350 Units Sold 28350 Difference in units =( Produces -Sold) 5000 Difference in manufacturing overheads = 40,000 (Difference in units * fixed manufacturing overheads per unit)

Calculation of Unit cost Under Variable Costing Second Quarter 1534000 Direct Material 7.2 Direct Labour 7.7 Variable Manufacturing Overhead 1.9 Unit Cost 16.80 2.A). Income Statement Under Variable Costing Sales (38350*40) Variable Expense Cost of Goods Sold (38350*16.80) 644280 Varaible Selling and Adminisatrative 260780 Total Varible Expenses Contribution Magin Fixed Expenses Fixed mufacturing Overheads 266800 Fixed Sellingand Administrative Expenses 218140 Total fixed Expenses Net Operating Income 905060 628940 484940 144000

Calculation of Unit cost Under Absorption Costing second Quarter Direct Material 7.2 Direct Labour Variable Manufacturing Overhead Fixed Manufacturing Over head 266800/33350 8.0 Unit Product cost 24.8 2B). Income Statement Under Absorption Costing Sales (38350*40) Cost of Goods Sold(38350*24.80) Gross Margin Selling and Administrative Overheads Net Operating Income(loss) second Quarter 1534000 951080 582920 478920 104000

2C). Reconcile the variable costing and absorption costing Net Variable Costing Net Operating Income 1,44,000 Deduct: Fixed Manufacturing Overheads cost -40,000 released from inventory Absorption Costing Net Operating Income 1,04,000 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 Quarte 33350 38350 -5000 -40,000