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 $ 834,900 Sales (23,000 units) Variable expenses: Variable cost of goods sold Variable selling and administrative $ 278,300 178,250 456,550 378,350 Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative 208,000 219,000 427,000 48,650) Net operating loss 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 Units sold Variable costs per unit: 26,000 23,000 Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative 7.30 $2.80 $2.00 7.75 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 26,000 units but sold 29,000 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.

Explanation / Answer

SOLUTION

1A. Unit product cost under absorption costing

1B. Income Statement under absorption costing

1C. Reconcilation between net operating loss between variable & absorption costing

3A. Income Statement under variable costing

3B. Income Statement under absorption costing

Unit product cost under absorption costing

3C. Reconcilation between net operating loss between variable & absorption costing

Particulars Amount ($) Direct Material 7.30 Direct labor 2.80 Variable manufacturing overheads 2.00 Fixed manufacturing overhead (208,000/26,000) 8.00 Unit product cost under absorption costing 20.10

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