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. $1,140,000 Tami's Creations, Inc. Income Statement For the Quarter Ended March 31 Sales (28,500 units) Variable expenses Variable cost of goods sold $ 456,000 Variable selling and administrative 198,075 Contribution margin Pixed expenses Pixed manufacturing overhead 252,000 Pixed selling and administrative 245, 925 Net operating loss 654,075 485,925 497.925 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: < Prev 2 of 2 Nex

Answer 1

1a.

Direct materials	7.20
Direct labor	6.80
Variable manufacturing overhead	2.00
Fixed manufacturing overhead ($252000/31500)	8.00
Unit product cost $	24.00

1b.

Tami's Creations, Inc.
Absorption Costing Income Statement
	Total
Sales (28500 units)	1140000
Cost of goods sold (28500 x $24.00)	684000
Gross profit	456000
Selling and administrative [$245925 + (28500 x $6.95)]	444000
Net operating income (loss) $	12000

1c.

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Variable costing net operating income (loss) $	-12000
Add: Fixed manufacturing overhead cost deferred in ending inventory under absorption costing [(31500 - 28500) x $8.00]	24000
Absorption costing net operating income (loss) $	12000

3a.

Tami's Creations, Inc.
Variable Costing Income Statement
Sales revenue ($1140000 x 34500/28500)		1380000
Less: Variable expenses
Variable cost of goods sold (34500 x $16.00)	552000
Variable selling and administrative expenses (34500 x $6.95)	239775
		791775
Contribution margin		588225
Less: Fixed expenses
Fixed manufacturing overhead	252000
Fixed selling and administrative expenses	245925
		497925
Net operating income (loss) $		90300

3b.

Tami's Creations, Inc.
Absorption Costing Income Statement
	Total
Sales (34500 units)	1380000
Cost of goods sold (34500 x $24.00)	828000
Gross profit	552000
Selling and administrative [$245925 + (34500 x $6.95)]	485700
Net operating income (loss) $	66300

3c.

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Variable costing net operating income (loss) $	90300
Less: Fixed manufacturing overhead cost released from beginning inventory (3000 x $8.00)	-24000
Absorption costing net operating income (loss) $	66300