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. $1. 132.000 Tami's Creations, Inc. Income Statement For the Quarter Ended March 31 Sales (28,300 units) Variable expenses: Variable cost of goods sold $438,650 Variable selling and administrative 198,100 Contribution margin Fixed expenses Fixed manufacturing overhead 266.400 Pixed selling and administrative Net operating loss 636, 750 515.250 20,000) 5 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 33,300 28,300 $ 7.30 $ 6.60 Variable coats per units Directatorials Direct labor Variable manufacturing overhead

Answer 1

Solution 1a:

Computation of Unit Product Cost - Absorption Costing
Particulars	Q1	Q2
Unit Product Cost:
Direct material	$7.30	$7.30
Direct Labor	$6.60	$6.60
Variable manufacturing overhead	$1.60	$1.60
Fixed manufacturing overhead ($266,400/33300)	$8.00	$8.00
Unit Product Cost	$23.50	$23.50

Solution 1b:

Tami Creations
Full Absorption income statement For the Quarter ended March 31
Particulars	Details	Amount
Sales		$1,132,000.00
Cost of Goods Sold:
Cost of goods produced (33300*$23.50)	$782,550.00
Add: Opening Inventory	$0.00
Less: Ending Inventory (5000*$23.50)	$117,500.00	$665,050.00
Gross Profit		$466,950.00
Variable Selling & Administrative Expenses		$198,100.00
Fixed Selling & Administrative Expenses		$248,850.00
Net Operating Income		$20,000.00

solution 1c:

Reconciliation of Net Operating income under absorption costing & Variable Costing - March 31
Particulars	Amount
Net Operating Income - Variable Costing	-$20,000.00
Add : Fixed manufacturing overhead deferred in inventory ($8*5000)	$40,000.00
Less: Fixed manufacturing overhead released in inventory	$0.00
Net Operating Income - Absorption Costing	$20,000.00

Solution 3a:

Computation of Unit Product Cost - Variable Costing
Particulars	Q1	Q2
Unit Product Cost:
Direct material	$7.30	$7.30
Direct Labor	$6.60	$6.60
Variable manufacturing overhead	$1.60	$1.60
Unit product cost	$15.50	$15.50

Tami Creations
Contribution margin income statement For the Quarter ended June 30
Particulars	Per unit	Amount
Sales	$40.00	$1,532,000.00
Variable Cost:
Variable manufacturing cost	$15.50	$593,650.00
Variable Selling and Administrative Expenses	$7.00	$268,100.00
Contribution	$17.50	$670,250.00
Fixed Manufacturing Overhead		$266,400.00
Fixed Selling & Administrative Expenses		$248,850.00
Net Income		$155,000.00

Solution 3b:

Tami Creations
Full Absorption income statement For the Quarter ended Jun 30
Particulars	Details	Amount
Sales		$1,532,000.00
Cost of Goods Sold:
Cost of goods produced (33300*$23.50)	$782,550.00
Add: Opening Inventory (5000*23.50)	$117,500.00
Less: Ending Inventory	$0.00	$900,050.00
Gross Profit		$631,950.00
Variable Selling & Administrative Expenses		$268,100.00
Fixed Selling & Administrative Expenses		$248,850.00
Net Operating Income		$115,000.00

Solution 3c:

Reconciliation of Net Operating income under absorption costing & Variable Costing - For quarter ended Jun 30
Particulars	Amount
Net Operating Income - Variable Costing	$155,000.00
Add : Fixed manufacturing overhead deferred in inventory	$0.00
Less: Fixed manufacturing overhead released in inventory (5000*$8)	$40,000.00
Net Operating Income - Absorption Costing	$115,000.00