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 would probably 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:

  

  

  

Compute the unit product cost under absorption costing. (Round your intermediate and final answers to 2 decimal places.)

         

Redo the company’s income statement for the quarter using absorption costing. (Round your intermediate calculations to 2 decimal places.)

         

Reconcile the variable and absorption costing net operating income (loss) figures. (Round your intermediate calculations to 2 decimal places.)

         

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.)

  

Prepare a contribution format income statement for the quarter using variable costing. (Round your intermediate calculations to 2 decimal places.)

         

Prepare an income statement for the quarter using absorption costing. (Round your intermediate calculations to 2 decimal places.)

         

Reconcile the variable costing and absorption costing net operating incomes. (Round your intermediate calculations to 2 decimal places.)

         

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.

Explanation / Answer

1.

a. Unit product cost under absorption costing is calculated as under:

b. Income statement under absorption costing is prepared as under:

c.

Variable and absorption costing net income is reconciled as under:

Cost of goods sold Unit Cost    Direct Material 23,000*7.6 174,800 7.6    Direct Labour 23,000*2.9 66,700 2.9    Variable manufacturing overhead 23,000*1.8 41,400 1.8    Annual fixed manufacturing overhead 23000*8.2 188,600 8.2 20.5

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