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 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:

Required:

1. Complete the following:

a. Compute the unit product cost under absorption costing.

b. What is the company’s absorption costing net operating income (loss) for the quarter?

c. Reconcile the variable and absorption costing net operating income (loss) figures.

3. 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. What is the company’s variable costing net operating income (loss) for the second quarter?

b. What is the company’s absorption costing net operating income (loss) for the second quarter?

c. Reconcile the variable costing and absorption costing net operating incomes for the second quarter.

Tami’s Creations, Inc.

Income Statement

For the Quarter Ended March 31

Sales (24,000 units) $ 871,200 Variable expenses: Variable cost of goods sold $ 285,600 Variable selling and administrative 188,400 474,000 Contribution margin 397,200 Fixed expenses: Fixed manufacturing overhead 218,700 Fixed selling and administrative 219,000 437,700 Net operating loss $ ( 40,500)

Explanation / Answer

Solution:

1a. Compute the unit product cost under absorption costing. Direct materials $7.60 Direct labor $2.60 Variable manufacturing overhead $1.70 Fixed Manufacturing Overhead ($ 218,700 / 27,000) $8.10 Absorption costing unit product cost $20.00 Production price per unit with absorption costing method $20.00 1 b. What is the company’s absorption costing net operating income (loss) for the quarter? Income statement with absorption costing Tami's Creation Inc Income statement with absorption costing For the Quarter Ended March 31 Sales (24,000 x $ 36.30) $ 871200 Cost of goods sold (24,000 x $ 20.00) 480000 Gross margin 391200 Selling and administrative expenses Variable selling and administrative 188400 Fixed selling and administrative 219000 407400 Net income Operation= -16200 c. Reconcile the variable and absorption costing net operating income (loss) figures. Reconciliation Variable costing loss operating income -40500 Add: Fixed Manufacturing Overhead deferred in inventory under absorption costing (3,000 units x $ 8.10) 24300 Absorption costing net operation income -16200 2). With the absorption costing method the company earns a loss of $ 16200 derived from a loss of operating income of $ 40500 added with Fixed Manufacturing Overhead of $ 24,300 so that by using the Absorption Costing method there is a loss of $ 16,200. 3 What is the company’s variable costing net operating income (loss) for the second quarter? 3 a. Net operating Income statement variable costing Tami's Creations, Inc.
Income statement For the Quarter Ended April 31 Sales (30,000 units x $ 36.30) 1089000 Variable Expenses: Variable cost of goods sold (30000*$11.9) 357000 Variable selling and administrative (30000*$7.85) 235500 592500 Contribution Margin = 496500 Fixed Expenses: Fixed Manufacturing Overhead $ 300,000 218,700 Fixed Selling and Administrative 219,000 437,700 Net Operating Income = 58,800 3b. What is the company’s absorption costing net operating income (loss) for the second quarter? 3 b. Net operating Income statement absorption costing Tami's Creations, Inc.
Income statement For the Quarter Ended April 31 Sales (30,000 units x $ 36.30) 1089000 Cost of Goods Sold (30,000 units x $ 20.00) 600000 Gross Margin = 489000 Selling and Administrative Expenses: Variable Selling and Administrative 235500 Fixed Selling and Administrative 219000 454500 Net Operating Income = 34500 c. Reconcile the variable costing and absorption costing net operating incomes for the second quarter. Reconciliation Variable Costing Net Operating Income 58800 Deduct: Fixed Manufacturing Overhead Inventory cost under absorption costing (3000 units x $ 8.10) 24300 Absorption Costing Net Operating Income= 34500

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