Question

Chapter 6

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. $ 1,144,000 Tami's Creations, Inc. Income Statement For the Quarter Ended March 31 Sales (28,600 units) Variable expenses: Variable cost of goods sold $ 494,780 Variable selling and administrative 191,620 Contribution margin Fixed expenses: Fixed manufacturing overhead 252,800 Fixed selling and administrative 216,800 Net operating loss 686,400 457,600 469,600 $ ( 12,000) 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: 31,600 28, 600 Units produced Units sold Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative $ 7.60 $ 7.90 $ 1.80 $ 6.70 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 31,600 units but sold 34,600 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.

Answer 1

1.

A.Unit product cost under Absorption costing

Direct materials	$7.60
Direct Labour	$7.90
Variable manufacturing overhead	$1.80
Fixed manufacturing overhead($252,800/31,600)	$8
Absorption costing unit product costs	$25.3

B. Absorption costing income statement

Sales	$1,144,000
Cost of goods sold (28,600×$25.3)	($723,580)
Gross margin	$420,420
Selling and administrative ($191,620+$216,800)	($408,420)
Net operating income	$12,000

C. Reconciliation of Variable costing and Absorption costing net operating income

Variable costing net operating loss	($12,000)
Add: Fixed manufacturing overhead cost deffered in inventory (3,000 units ×$8)	$24,000
Absorption costing net operating income	$12,000

* Units in Ending inventory =0 units+ 31,600-28,600=3,000 units

3.

A. Variable costing income statement

Sales (34,600×40)		$1,384,000
Less: Variable expenses
Variable cost of goods sold (34,600×17.3)	$598,580
Variable selling and administrative(34,600×6.70)	$231,820
		($830,400)
Contribution margin		$553,600
Fixed expenses:
Fixed manufacturing overhead	$252,000
Fixed selling and administrative	$216,800	$469,600
Net operating income		$84,000

B. Absorption costing income statement

Sales	$1,384,000
Cost of goods sold (34,600×$25.3)	($875,380)
Gross margin	$508,620
Selling and administrative expense (34,600×$6.70 +$216,800)	($448,620)
Net operating income	$60,000

C. Reconciliation of Variable costing and Absorption costing net operating income

Variable costing net operating income	$84,000
Deduct: Fixed manufacturing overhead cost released from inventory under Absorption costing (3,000×8)	($24,000)
Absorption costing net operating income	$60,000

* Units in Ending inventory. = Beginning inventory + units produced- units sold

= 3,000+31,600-34,600 = 0 units

_____×_____

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