Taml Tyler opened Taml\'s Creations, Inc., a small manufacturing company, at the

Question

Taml Tyler opened Taml'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 straln 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 managerlal accounting at State University. Tami's Creations, Inc. Income Statement For the Quarter Ended March 31 Sales (22,000 units) Variable expenses: $ 798,600 Variable cost of goods sold Variable selling and administrative $264,000 171,600 435,600 Contribution margin Fixed expenses: 363,008 Fixed manufacturing overhead Fixed selling and administrative221,00e 202,500 423,500 Net operating loss 60,500) 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 varlable 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 polnt, Ms. Tyler is manufacturing only one product-a swimsuit. Production and cost data relating to the swimsult for the first quarter follow:

Explanation / Answer

Req 1-a Unit product cost under Absorption costing: Material cost 7.60 Labour cost 2.80 Mfg OH variable 1.60 Fixed mfg OH (202500/25000) 8.10 Unit product cost under Absorption costing: 20.10 Req 1-b: Income Statement: Sales 798600 Less: Cost of goods sold 442200 Gross profit 356400 Selling and admin expense 392,600 Net Income -36,200 Req 1-c: Reconciliation Statement Variable costing net income -60500 Add: Fixed MFg OH deferred (3000 units @8.10) 24300 Net Income as per Absorption costing -36200 Req 3-a: Contribution margin income statement (2 nd quarter) Sales (798600/22000*28000) 1016400 Variable expenses Variable cost of goods sold (28000 units @12) 336000 Variable selling and admin expense (28000*7.80) 218400 554400 Contribution Margin    462000 Less: Fixed cost Fixed Manufacturing Overheads 202500 Fixed Sselling and admin Overheads 221000 423500 Net Operating income 38500 Req 3-b: Absorption income Statement: Sales 1016400 Less: Cost of goods sold 562800 Gross profit 453600 Selling and admin expense 439,400 Net Income 14,200 Req 3c Reconciliation Statement: Variable costing income statement 38500 Less: Fixed Mfg OH released (3000*8.10) 24300 Income under absorption costing 14200

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