Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the

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

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:

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 31,100 units but sold 34,100 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.

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 $ 413,070 Variable selling and administrative 192,485 605,555 Contribution margin 518,445 Fixed expenses: Fixed manufacturing overhead 276,790 Fixed selling and administrative 255,005 531,795 Net operating loss $ ( 13,350)

Explanation / Answer

1a. Direct materials 7.50 Direct labor 5.70 Variable manufacturing overhead 1.50 Fixed manufacturing overhead ($276790/31100) 8.90 Unit product cost $ 23.60 b. Sales (28100 units) 1124000 Cost of goods sold (28100 x $23.60) 663160 Gross profit 460840 Selling and administrative [$255005 + (28100 x $6.85)] 447490 Net operating income $ 13350 c. Variable costing net operating income (loss) $ -13350 Add: Fixed manufacturing overhead cost deferred in ending inventory under absorption costing [(31100 - 28100) x $8.90] 26700 Absorption costing net operating income $ 13350 3a. Sales revenue ($1124000 x 34100/28100) 1364000 Less: Variable expenses Variable cost of goods sold (34100 x $14.70) 501270 Variable selling and administrative expenses (34100 x $6.85) 233585 Total variable expenses 734855 Contribution margin 629145 Less: Fixed expenses Fixed manufacturing overhead 276790 Fixed selling and administrative expenses 255005 Total fixed expenses 531795 Net operating income $ 97350 b. Sales (34100 units) 1364000 Cost of goods sold (34100 x $23.60) 804760 Gross profit 559240 Selling and administrative [$255005 + (34100 x $6.85)] 488590 Net operating income $ 70650 c. Variable costing net operating income (loss) $ 97350 Add: Fixed manufacturing overhead cost deferred in ending inventory under absorption costing 0 Less: Fixed manufacturing overhead cost released from beginning inventory (3000 x $8.90) 26700 Absorption costing net operating income $ 70650

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