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:

  

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

Income Statement for Quarter 2

unit product cost under absorption costing

income statment under absortion costing

Reconcilaitaion

Income under variable costing                                                  $30,800

less:Deferred fixed cost in opening inventory

        (3,000*8.20)                                                                            24,600

Net income under absorption costing                                       $6,200

Sales (29,000*36.30) $1,052,700 Variable expense Cost of goods sold (29,000 *12.30) $356,700 Varibel selling and administratice (29,000*8)    232,000 Contribution margin 464,000 Fixed expenses : Fixed manufacturing overhead $213,200 Fixed selling and administrative 220,000 432,000 Net operating income 30,800

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