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 $ 427,500 Variable selling and administrative 199,500 Contribution margin Fixed expenses: Fixed manufacturing overhead 283,500 Fixed selling and administrative 243,000 Niet operating loss 627,000 513,000 526,500 6( 13,500) 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: 31,500 28,500 Units produced Units sold Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative 4.7.20 66.00 $ 1.80 $ 7.00 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 (oss) 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 31,500 units but sold 34,500 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 Complete this question by entering your answers in the tabs below.

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Answer 1

Answer to Part 1-a.

Fixed Manufacturing Overhead per Unit = Fixed Manufacturing Overhead / Units Produced
Fixed Manufacturing Overhead per Unit = $283,500 / 31,500
Fixed Manufacturing Overhead per Unit = $9.00

Unit Product Cost as per Absorption Costing = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Fixed Manufacturing Overhead
Unit Product Cost as per Absorption Costing = $7.20 + $6.00 + $1.80 + $9.00
Unit Product Cost as per Absorption Costing = $24.00

Answer to Part 1-b. TAMI'S CREATIONS, INC. Absorption Costing Income Statement Sales Cost of Goods sold Gross Margin Selling and Administrative Expenses Net Operating Income (Loss) Total 1,140,000 684,000 456,000 442,500 13,500 Calculation: Cost of Goods Sold = 28,500 * $24.00 = $684,000 Selling and Administrative Expenses = $243,000 + (28,500 * $7.00) = $442,500 Answer to Part 1-c. Reconciliation of Variable Costing and Absorption Costing Net Opertaing Income (Losses) Variable Costing Net Operating Income (Loss) -13,500 Add: Fixed Manufacturing Overhead cost deferred in Inventory 27,000 Absorption Costing Net Operating Income (Loss) 13,500

Calculation: Ending Inventory Units = Beginning Inventory Units + Units Produced - Units Sold Ending Inventory Units = 0 + 31,500 - 28,500 = 3,000 Units Fixed Manufacturing Overhead cost deferred in Inventory = 3,000 * $9.00 = $27,000 1,380,000 517,500 241,500 Answer to Part 3-a. TAMI'S CREATIONS, INC. Variable Costing Income Statement Sales Variable Expenses: Variable Cost of Goods sold Variable Selling and Administrative Expenses Total Variable Expenses Contribution Margin Fixed Expenses: Fixed Manufacturing Overhead Fixed Selling and Administrative Expenses Total Fixed Expenses Net Operating Income 759,000 621,000 283,500 243,000 526,500 94,500

Calculation:
Selling price per unit = $1,140,000 / 28,500 = $40.00
Product Cost using Variable Costing = $7.20 + $6.00 + $1.80 = $15.00

Answer to Part 3-b. TAMI'S CREATIONS, INC. Absorption Costing Income Statement Sales Cost of Goods sold Gross Margin Selling and Administrative Expenses Net Operating Income (Loss) Total 1,380,000 828,000 552,000 484,500 67,500 Calculation: Selling price per unit = $1,140,000 / 28,500 = $40.00 Product Cost = $7.20 + $6.00 + $1.80 + $9.00 = $24.00 Cost of Goods sold = 34,500 * $24 = $828,000 Selling and Administrative Expenses = $243,000 + (34,500 * $7.00) = $484,500

Answer to Part 3-c. Reconciliation of Variable Costing and Absorption Costing Net Operating Income (Losses) Variable Costing Net Operating Income (Loss) 94,500 Deduct: Fixed Manufacturing Overhead cost deferred in Inventory Absorption Costing Net Operating Income (Loss) 27,000 67,500 Calculation: Ending Inventory Units = Beginning Inventory Units + Units Produced - Units Sold Ending Inventory Units = 3,000 + 31,000 - 34,500 = 0 Units Fixed Manufacturing Overhead cost deferred in Inventory = 3,000 * $9.00 = $27,000