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.

Sales (24,000 units):- / $871,200

Variable expenses:

Variable cost of goods sold: $292,800/ -

variable seeling and administrative expenses: 189,600/ 482,400

contribution margin: - / 388,800

Fixed expenses:

fixed manufacturing overhead: 226,800/ -

fixed selling and administrative expenses: 219,000/ 445,800

nett operating loss: $(57,000)

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: 27,000

units sold: 24,000

variable costs per unit:

direct materials: $7.60

direct labor: $2.70

variable manufacturing overhead: $1.90

variable selling and administrative: $7.90

1. during the second quarter of operations, the company again produced 27,000 units but sold 30,000. (Asumes no change in total fixed costs)

a. prepare a contribution format income statement for the quarter using variable costing. (round your intermediate calculations to 2 decimal places.)

b. prepare an income statement for the quarter using absorption costing. (round your intermediate calculations to 2 decimal places.)

c. reconcile the variable costing and absoprtion costing net operating incomes. (round your intermediate calculations to 2 decimal places.)

variable costing net operating income (loss) ? deduct: fixed manufacturin overhead cost released from inventory under absorption costing ? absorption soting net operating income (loss) ?

Explanation / Answer

Req A: Contribution format using variable costing Sales Revenue (30,000 units @ (871200/24000)) 1,089,000 Less: variable cost: Direct material (30,000 units@7.60) 228000 Direct labour(30000 units @2.70) 81000 Manufacturing overheads (30000 units@1.90) 57000 Selling overheads(30000 unts @7.90) 237000 Contribution 486,000 Less: Fixed cost Manufacturing overheads    226800 Selling overheads 219000 Net Operating income 40,200 ReqB: Cost per unit under absorption costing(of last quarter) Total cost: Cost of goods sold 292800 Fixed manufacturing overheads 226800 Total cost of 24000 units 519600 Cost per unit (519600/24000) 21.65 per unit Income Statement Sales Revenue 1089000 Less: Cost of goods sold: Direct material (27,000*7.60) 205200 Direct labour(27000*2.70) 72900 Mfg Overhead (27000*1.90) 51300 Fixed Mfg overheads 226800 Current cost of production of 27000 units 556200 Add: Opening stock of Finished goods 64950 (3000 units@21.65) Cost of goods sold 621150 Gross margin 467850 Less: Selling expense Variable (30,000 units@7.90) 237000 Fixed selling expense 219000 Net Operating income 11850 Reconciliation Statement: Variable costing net operating income 40,200 Less: Fixed manufactuirng overheads realeased in inventory under Absorption 28350 (226800/24000 *3000 units) Absorption costing net operating income 11,850

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