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 31,300 units but sold 34,300 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 (28,300 units) $ 1,132,000 Variable expenses: Variable cost of goods sold $ 466,950 Variable selling and administrative 192,440 659,390 Contribution margin 472,610 Fixed expenses: Fixed manufacturing overhead 275,440 Fixed selling and administrative 210,370 485,810 Net operating loss $ ( 13,200)

Explanation / Answer

1a. Direct materials 7.50 Direct labor 7.10 Variable manufacturing overhead 1.90 Fixed manufacturing overhead ($275440/31300) 8.80 Unit product cost $ 25.30 b. Sales (28300 units) 1132000 Cost of goods sold (28300 x $25.30) 715990 Gross profit 416010 Selling and administrative [$210370 + (28300 x $6.80)] 402810 Net operating income $ 13200 c. Variable costing net operating income (loss) $ -13200 Add: Fixed manufacturing overhead cost deferred in ending inventory under absorption costing [(31300 - 28300) x $8.80] 26400 Absorption costing net operating income $ 13200 3a. Sales revenue ($1132000 x 34300/28300) 1372000 Less: Variable expenses Variable cost of goods sold (34300 x $16.50) 565950 Variable selling and administrative expenses (34300 x $6.80) 233240 Total variable expenses 799190 Contribution margin 572810 Less: Fixed expenses Fixed manufacturing overhead 275440 Fixed selling and administrative expenses 210370 Total fixed expenses 485810 Net operating income $ 87000 b. Sales (34300 units) 1372000 Cost of goods sold (34300 x $25.30) 867790 Gross profit 504210 Selling and administrative [$210370 + (34300 x $6.80)] 443610 Net operating income $ 60600 c. Variable costing net operating income (loss) $ 87000 Add: Fixed manufacturing overhead cost deferred in ending inventory under absorption costing 0 Less: Fixed manufacturing overhead cost released from beginning inventory (3000 x $8.80) 26400 Absorption costing net operating income $ 60600

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.