Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the
ID: 2573530 • 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 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 26,000 units but sold 29,000 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 (23,000 units) $ 834,900 Variable expenses: Variable cost of goods sold $ 271,400 Variable selling and administrative 177,100 448,500 Contribution margin 386,400 Fixed expenses: Fixed manufacturing overhead 213,200 Fixed selling and administrative 220,000 433,200 Net operating loss $ ( 46,800)Explanation / Answer
1. a:
under absorption costing fixed costs are allocated to the total production of 26000, hence fixed manf and selling and adm are allocated based on 26000 units.
1 b. Net operating income= (selling price per unit- per unit cost)* total units sold= (36.3- 36.161538)*23000= 3184.62 profit
selling price per unit= total sales/ units sold= 834900/23000= 36.3 per unit
Net income above equation holds good until number of units sold is lessthan or equal to number of units produced
1c. Reconciling amounts are due to fixed cost per unit allocatin in absorption costing where as in variable costing fixed costs are in total charged to income statement.The amount of fixed costs charged to income statement under variable costing related to unsold goods will be the reconciling item.
Net income as per variable costing= -46800
Add:Fixed costs of unsold items( 3000* (8.2+8.461538) )= 49984.62
Net income under absorption costing =3184.62
3. Variable costing net income:
c. Reconciliation reasons:
In variable costing fixed costs related to previous quarter charged to profit in the last quarter itself, but under absorption costing fixed cost portion related unsold inventory is carried to current quarter and charged to profit.
Reco:
Net income as per variable costing= 54000
Less: fixed costs of unsold items included in opening inventory ( 3000* (8.2+8.461538) )= 49984.62
Net income under absorption costing =4015.38
Unit costs under absorption costing: Direct material 7.20 Direct labor 3.00 Variable manufacturing OH 1.60 Variable selling and administrative 7.70 Fixed manufacturing OH =213200/26000 8.20 Fixed selling and administrative exp =220000/26000 8.461538 Unit cost 36.161538Related Questions
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