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 $ 907,500 Sales (25,000 units) Variable expenses Variable cost of goods sold Variable selling and administrative $307,500 193,750 501,250 406,250 Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative 232,400 218,000 450,400 Net operating loss $ (44,150) 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 Units sold Variable costs per unit: 28,000 25,000 Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative $ 7.50 $ 3.00 $ 1.80 $ 7.75

Explanation / Answer

First Quarter Operations Second Quarter Operations Answer a Answer a Computation of unit product cost under absorption costing Tami Creations Inc. Unit cost Variable Costing Income statement Direct Material $7.50 Sales [31000 units * $36.30] $1,125,300.00 Direct Labour $3.00 Less : Variable expenses Variable Manufacturing Overhead $1.80 Variable cost of goods sold [31000 units * $12.30] $381,300.00 Fixed Manufacturing Overhead [$232400 / 28000 units produced] $8.30 Variable selling and adm.exp.[31000 units * $7.75] $240,250.00 $621,550.00 Unit Product Cost under Absorption Costing $20.60 Contribution Margin $503,750.00 Less : Fixed Expenses Answer b Fixed Manufacturing Overhead $232,400.00 Income statement under Absorption Costing Fixed selling and administrative $218,000.00 $450,400.00 Tami Creations Inc. Net Operating Income / (loss) $53,350.00 Absorption Costing Income statement Sales $907,500.00 Answer b Less : Cost of goods sold [25000 units * $20.60] $515,000.00 Income statement under Absorption Costing Gross Margin $392,500.00 Tami Creations Inc. Less : Selling and adminsitrative Costs Absorption Costing Income statement - Variable $193,750.00 Sales [31000 units * $36.30] $1,125,300.00 - Fixed $218,000.00 Less : Cost of goods sold [31000 units * $20.60] $638,600.00 Net Operating Income / (loss) -$19,250.00 Gross Margin $486,700.00 Less : Selling and adminsitrative Costs Answer c - Variable $240,250.00 Reconciliation of variable and absorption costing net operating income (loss) - Fixed $218,000.00 Variable costing net income (loss) -$44,150.00 Net Operating Income / (loss) $28,450.00 Add : Fixed manufacturing overhead component in ending inventory [3000 units * $8.30] $24,900.00 Absorption costing net operating income / (loss) -$19,250.00 Answer c Reconciliation of variable and absorption costing net operating income (loss) Variable costing net income (loss) $53,350.00 Add : Fixed manufacturing overhead component in ending inventory [3000 units * $8.30] $0.00 Less : Fixed manufacturing overhead component in beginning inventory [3000 units * $8.30] $24,900.00 Absorption costing net operating income / (loss) $28,450.00

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