Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the
ID: 2463998 • 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 (28,000 units) . . . . . . . . . . . . . . . . . . . . . . $1,120,000
Variable expenses:
Variable cost of goods sold . . . . . . . . . . . . . . $462,000
Variable selling and administrative . . . . . . . . . 168,000 630,000
Contribution margin . . . . . . . . . . . . . . . . . . . . . . 490,000
Fixed expenses:
Fixed manufacturing overhead . . . . . . . . . . . . 300,000
Fixed selling and administrative . . . . . . . . . . . 200,000 500,000
Net operating loss . . . . . . . . . . . . . . . . . . . . . . . $ (10,000 )
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:
Units produced . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Units sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000
Variable costs per unit:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.00
Variable manufacturing overhead . . . . . . . . . . . . $1.00
Variable selling and administrative . . . . . . . . . . . $6.00
Required:
1. Complete the following:
a. Compute the unit product cost under absorption costing.
b. Redo the company’s income statement for the quarter using absorption costing.
c. Reconcile the variable and absorption costing net operating income (loss) figures.
2. Was the CPA correct in suggesting that the company really earned a “profit” for the quarter?
Explain.
3. During the second quarter of operations, the company again produced 30,000 units but sold
32,000 units. (Assume no change in total fixed costs.)
a. Prepare a contribution format income statement for the quarter using variable costing.
b. Prepare an income statement for the quarter using absorption costing.
c. Reconcile the variable costing and absorption costing net operating incomes.
Explanation / Answer
1. a. Absorption costing unit product cost is:
Direct materials...............................
$ 3.50
Direct labor.....................................
12.00
Variable manufacturing overhead......
1.00
Fixed manufacturing overhead
($300,000 ÷ 30,000 units)..............
10.00
Absorption costing unit product cost..
$26.50
b. The absorption costing income statement is:
Sales (28,000 units)...........................................
$1,120,000
Cost of goods sold (28,000 units × $26.50 per unit)
742,000
Gross margin....................................................
378,000
Selling and administrative expenses
($200,000 + 28,000 units × $6.00 per unit)........
368,000
Net operating income.........................................
$ 10,000
c. The reconciliation is as follows:
Units in ending inventory = Units in beginning inventory + Units produced – Units sold = 0 units +30,000 units – 28,000 units
= 2,000 units
Manufacturing overhead deferred in (released from) inventory = Fixed manufacturing overhead in ending inventory – Fixed manufacturing overhead in beginning inventory = (2,000 units × $10 per unit) – $0
= $20,000
Variable costing net loss.....................................
$(10,000)
Add fixed manufacturing overhead cost deferred in inventory under absorption costing...................
20,000
Absorption costing net operating income..............
$ 10,000
Direct materials...............................
$ 3.50
Direct labor.....................................
12.00
Variable manufacturing overhead......
1.00
Fixed manufacturing overhead
($300,000 ÷ 30,000 units)..............
10.00
Absorption costing unit product cost..
$26.50
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