Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the
ID: 2492471 • 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
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.
c. Reconcile the variable and absorption costing net operating income (loss) figures
2. During the second quarter of operations, the company again produced 27,000 units but sold 30,000 units. (Assume no change in total fixed costs.)
Prepare a contribution format income statement for the quarter using variable costing.
Prepare an income statement for the quarter using absorption costing.
Reconcile the variable costing and absorption costing net operating incomes.
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:
Units produced 27,000 Units sold 24,000 Variable costs per unit: Direct materials $ 7.60 Direct labor $ 2.90 Variable manufacturing overhead $ 1.70 Variable selling and administrative $ 8.00 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.
c. Reconcile the variable and absorption costing net operating income (loss) figures
2. During the second quarter of operations, the company again produced 27,000 units but sold 30,000 units. (Assume no change in total fixed costs.)
a.Prepare a contribution format income statement for the quarter using variable costing.
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) Tami’s Creations, Inc. COST OF PRODUCTION - ABSORPTION COSTING For the Quarter Ended March 31 Total Cost Unit Cost Direct Materials 205200 7.6 Direct Labor 78300 2.9 Variable Manufacturing Overhead 45900 1.7 Fixed Manufacturing Overhead 221400 8.2 550800 20.4 1-b) Income Statement-Using Absorption Costing For the Quarter Ended March 31 Sales 871200 Less: Cost of goods sold: Beginning inventory 0 Ad: Cost of goods produced 550800 Costs of goods available for sale 550800 Ending inventory (3000*20.4) 61200 Cost of goods sold 489600 Gross Profit 381600 Less: Selling & Administration Exp: Variable 192000 Fixed 218000 410000 Net Operating Income -28400 1-c) RECONCILIATION OF DIFFERENCE IN NET LOSS Net Operating loss under variable costing 53000 Less: Difference in ending inventory value: Value under absorption costing 61200 (3000*20.4) Value under variable costing 36600 24600 (3000*12.2) Net Operating loss under absorption costing 28400 2-a) INCOME STATEMENT USING VARIABLE COSTING For the Quarter ended June 30 Sales (30000*36.3) 1089000 Cost of goods sold: Beginning inventory (3000*12.2) 36600 Cost of goods produced (27000*12.2) 329400 Cost of goods available for sale 366000 Less: Ending inventory 0 Cost of goods sold 366000 Gross Contribution Margin 723000 Less: Variable selling & admn expes 240000 Contribution margin 483000 Less: Fixed costs: Manufacturing 221400 Selling and administration 218000 439400 Net operating income 43600 Income Statement-Using Absorption Costing For the Quarter Ended March 31 Sales 1089000 Less: Cost of goods sold: Beginning inventory 61200 Ad: Cost of goods produced 550800 Costs of goods available for sale 612000 Ending inventory 0 Cost of goods sold 612000 Gross Profit 477000 Less: Selling & Administration Exp: Variable 240000 Fixed 218000 458000 Net Operating Income 19000 RECONCILIATION OF DIFFERENCE IN NET OPERATING Income Net Operating profit under variable costing 43600 Less: Difference in beginning inventory value: Value under absorption costing 61200 (3000*20.4) Value under variable costing 36600 24600 (3000*12.2) Difference in ending inventory value 0 Net Operating profit under absorption costing 19000
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