Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the
ID: 2416711 • Letter: T
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
Sales (22,000 units)
$
798,600
Variable expenses:
Variable cost of goods sold
$
268,400
Variable selling and administrative
173,800
442,200
Contribution margin
356,400
Fixed expenses:
Fixed manufacturing overhead
207,500
Fixed selling and administrative
215,000
422,500
Net operating loss
$
( 66,100)
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:
Units produced
25,000
Units sold
22,000
Variable costs per unit:
Direct materials
$
7.50
Direct labor
$
2.90
Variable manufacturing overhead
$
1.80
Variable selling and administrative
$
7.90
Required:
1.
Complete the following:
a.
Compute the unit product cost under absorption costing. (Round your intermediate and final answers to 2 decimal places.)
b.
Redo the company’s income statement for the quarter using absorption costing. (Round your intermediate calculations to 2 decimal places.)
c.
Reconcile the variable and absorption costing net operating income (loss) figures. (Round your intermediate calculations to 2 decimal places.)
2.
During the second quarter of operations, the company again produced 25,000 units but sold 28,000 units. (Assume no change in total fixed costs.)
a.
Prepare a contribution format income statement for the quarter using variable costing. (Round your intermediate calculations to 2 decimal places.)
b.
Prepare an income statement for the quarter using absorption costing. (Round your intermediate calculations to 2 decimal places.)
c.
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.
Tami’s Creations, Inc.
Income Statement
For the Quarter Ended March 31
Sales (22,000 units)
$
798,600
Variable expenses:
Variable cost of goods sold
$
268,400
Variable selling and administrative
173,800
442,200
Contribution margin
356,400
Fixed expenses:
Fixed manufacturing overhead
207,500
Fixed selling and administrative
215,000
422,500
Net operating loss
$
( 66,100)
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:
Units produced
25,000
Units sold
22,000
Variable costs per unit:
Direct materials
$
7.50
Direct labor
$
2.90
Variable manufacturing overhead
$
1.80
Variable selling and administrative
$
7.90
Required:
1.
Complete the following:
a.
Compute the unit product cost under absorption costing. (Round your intermediate and final answers to 2 decimal places.)
Explanation / Answer
Answer 1.a. Calculation of Unit Product Cost Under Absorption Costing Particulars Amt. Variable Cost per Unit Direct Materials 7.50 Direct Labor 2.90 Variable Manufacturing Overhead 1.80 Total Variable Cost per Unit 12.20 Fixed Manufacuring Overhead 8.30 ($207500 / 25000 Units) Total Cost Per Unit 20.50 Answer 1.b. Income Statement As per Absorption Costing Particulars Amt. Sales (22000 Units x $36.30) 798,600 Less: Cost of Goods Sold (451,000) Less: Varaible Selling & Administrative (173,800) Less: Fixed Selling & administrative Exp. (215,000) Net operating income / (loss) (41,200) Calculation of Cost of Goods Sold Under Absorption Costing Particulars Amt. Op. Stock of Finished inventory - Add: Cost of Goods Manufactured 512,500 ($20.50 X 25000 Units) Less: Closing Inventory of Finished Goods (61,500) ($20.50 X 3000 Units) Cost of Goods Sold 451,000 Answer 1.c. Reconcilation Statement of Variable and Absorption Costing Net Operatin g Income Particulars Amt. Net Operating Income (Loss) as per Variable Costing (66,100) Difference in Value of Closing Inventory 24,900 Net Operating Income (Loss) as per Absorption Costing (41,200) Calculation of Difference between Value of Closing Stock Under Variable and Absorption Costing Value of Closing Inventory Under Variable Costing 36,600 (3000 Units X ($7.50 + 2.90 + 1.80)) Value of Closing Inventory Under Absorption Costing 61,500 ($20.50 X 3000 Units) Difference (24,900) Answer 2. a. Contribution Format Income Statement For the II Quarter Particulars Amt. Sales (28000 Units X $36.30) 1,016,400 Less: Variable Expenses Variable cost of Goods Sold ($12.20 X 28000) 341,600 Variable Selling and administrative ($7.90 x 28000) 221,200 Total Variable Costs 562,800 Contribution margin 453,600 Less: Fixed Expenses Manufacturing Overhead 207,500 Selling & Administrative Exp. 215,000 Total Fixed Expenes 422,500 Net Operating Income / (Loss) 31,100 Answer 2. b. Income Statement FOR II Qtr As per Absorption Costing Particulars Amt. Sales (28000 Units x $36.30) 1,016,400 Less: Cost of Goods Sold (574,000) Less: Varaible Selling & Administrative (221,200) Less: Fixed Selling & administrative Exp. (215,000) Net operating income / (loss) 6,200 Calculation of Unit Product Cost of II Qtr Under Absorption Costing Particulars Amt. Variable Cost per Unit Direct Materials 7.50 Direct Labor 2.90 Variable Manufacturing Overhead 1.80 Total Variable Cost per Unit 12.20 Fixed Manufacuring Overhead 8.30 ($207500 / 25000 Units) Total Cost Per Unit 20.50 Calculation of Cost of Goods Sold of II Qtr Under Absorption Costing Particulars Amt. Op. Stock of Finished inventory 61,500 Add: Cost of Goods Manufactured 512,500 ($20.50 X 25000 Units) Less: Closing Inventory of Finished Goods - Cost of Goods Sold 574,000 Answer 2. c. Reconcilation Statement of Variable and Absorption Costing Net Operatin g Income of II Qtr Particulars Amt. Net Operating Income (Loss) as per Variable Costing 31,100 Difference in Value of Opening Inventory (24,900) Net Operating Income (Loss) as per Absorption Costing 6,200 Calculation of Difference between Value of Opening Stock Under Variable and Absorption Costing of II Qtr Value of Closing Inventory Under Variable Costing 36,600 (3000 Units X ($7.50 + 2.90 + 1.80)) Value of Closing Inventory Under Absorption Costing 61,500 ($20.50 X 3000 Units) Difference (24,900)
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