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:

3. During the second quarter of operations, the company again produced 31,500 units but sold 34,500 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 (28,500 units) $ 1,140,000 Variable expenses: Variable cost of goods sold $ 481,650 Variable selling and administrative 199,500 681,150 Contribution margin 458,850 Fixed expenses: Fixed manufacturing overhead 283,500 Fixed selling and administrative 188,850 472,350 Net operating loss $ ( 13,500)

Explanation / Answer

3a)

selling price per unit =1140000/28500=$ 40

Variable manufacturing cost per unit = 7.4 +7.8+ 1.7 = 16.90

Variable costing Income statement

for the quarter endingJune 30

b)Fixed manufacturing overhead per unit = 283500/31500=9 per unit

cost of goods sold per unit = variable manufacturing cost per unit +fixed manufacturing overhead per unit

=16.9+9 =25.9

c)

**Beginning inventory = 31500-28500 = 3000 units

Variable costing Income statement

for the quarter endingJune 30

sales [34500*40] 1380000 less:variable expense Variable manufacturing cost [16.9*34500] 583050 Variable selling and administrative [7*34500] 241500 Total variable cost (824550) contribution margin 555450 less:Fixed cost Fixed manufacturing overhead 283500 Fixed selling and administrative 188850 (472350) Net operating income 83100

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