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 27,000 units but sold 30,000 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.

PLEASE EXPLAIN AND BOLD ALL ANSWERS THANK YOU

1A. Compute the unit product cost under absorption costing. (Round your answer to 2 decimal places.)

1B...What is the company’s absorption costing net operating income (loss) for the quarter?

Advertising

Beginning merchandise inventory

Commissions

Cost of goods sold

Depreciation

Direct labor

Direct materials

Ending merchandise inventory

Fixed manufacturing overhead

Indirect labor

Indirect materials

Purchases

Sales

Selling and administrative expenses

Variable manufacturing overhead

1C... Reconcile the variable and absorption costing net operating income (loss) figures.  (Losses and deductions should be entered as a negative.)

3A. During the second quarter of operations, the company again produced 27,000 units but sold 30,000 units. What is the company’s variable costing net operating income (loss) for the second quarter?

Administrative expenses

Advertising

Beginning merchandise inventory

Commissions

Depreciation

Ending merchandise inventory

Fixed manufacturing overhead

Fixed selling and administrative

Indirect labor

Indirect materials

Purchases

Sales

Variable cost of goods sold

Variable selling and administrative

3B... During the second quarter of operations, the company again produced 27,000 units but sold 30,000 units. What is the company’s absorption costing net operating income (loss) for the second quarter?

Advertising

Beginning merchandise inventory

Commissions

Cost of goods sold

Depreciation

Direct labor

Direct materials

Ending merchandise inventory

Fixed manufacturing overhead

Indirect labor

Indirect materials

Purchases

Sales

Selling and administrative expenses

Variable manufacturing overhead

3C... During the second quarter of operations, the company again produced 27,000 units but sold 30,000 units. Reconcile the variable costing and absorption costing net operating incomes (losses) for the second quarter.  (Losses and deductions should be entered as a negative.)

Tami’s Creations, Inc.

Income Statement

For the Quarter Ended March 31

Sales (24,000 units) $ 871,200 Variable expenses: Variable cost of goods sold $ 288,000 Variable selling and administrative 186,000 474,000 Contribution margin 397,200 Fixed expenses: Fixed manufacturing overhead 224,100 Fixed selling and administrative 218,000 442,100 Net operating loss $ ( 44,900)

Explanation / Answer

SOLUTION

(1A) Unit product cost under absorption costing

(1B) Absorption costing income statement-

(1C)

*Units in ending inventory = Units in beginning inventory + Units produced – Units sold

= 0 units + 27,000 units – 24,000 units = 3,000 units

Fixed manufacturing overhead cost deferred in inventory under absorption costing (3,000 units * $8.30 per unit) = $24,900

(3A)

Selling price per unit = $871,200/24,000 = $36.30

(3B)

Absorption costing income statement-

(3C)

*Units in ending inventory = Units in beginning inventory + Units produced – Units sold

= 0 units + 27,000 units – 30,000 units = 0 units

Fixed manufacturing overhead cost deferred in inventory under absorption costing (3,000 units * $8.30 per unit) = $24,900

Amount ($) Direct materials 7.40 Direct labor 2.70 Variable manufacturing overhead 1.90 Fixed manufacturing overhead ($224,100 / 27,000 units) 8.30 Absorption costing unit product cost 20.30

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