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 $ 292,800 Variable selling and administrative 190,800 483,600 Contribution margin 387,600 Fixed expenses: Fixed manufacturing overhead 229,500 Fixed selling and administrative 220,000 449,500 Net operating loss $ ( 61,900)

Explanation / Answer

Construct The Absorption Costing Unit Product Cost Q-1 Direct Material 7.30 Direct labour 3.00 Variable Manufacturing overheads 1.90 Fixed Manufacturing overheads 8.50 Absorption costing unit prroduct cost 20.70 Construct the Absorption Costing Income Statement Q-1 Sales $871,200 Cost of Goods sold 496800 Gross Margin $374,400 Selling and distribution expense 410,800 Net operating income -36,400 Reconciliation: Net loss as per variable costing -61900 Add: Fixed expense deferred in Ending inventory (3000*8.50) 25500 Net loss under absorption costing -36400 Compute the Variable costing Unit Product cost Q-2 Direct Material 7.30 Direct labour 3.00 Variable Manufacturing overheads 1.90 Variable costing unit prroduct cost 12.20 Construct The Variable Costing Income Statement Q-2 Sales 1,089,000 Less: Variable cost    variable cost of goods sold 366,000    Variable selling expense 238,500 604,500 Contribution margin 484,500 Fixed expense:    Fixed Manufacturing overheads 229,500    Fixed selling expense 220,000 Net operating Income 35,000 Construct the Absorption Costing Income Statement Q-2 Sales $1,089,000 Cost of Goods sold 621000 Gross Margin $468,000 Selling and distribution expense 458,500 Net operating income 9,500 Reconiliation: Net Income as per Vvariable costing 35000 Less: Fixed Cost released in Beginning Inventory -25500 Net Income under Absorptionn costing 9500

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