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 Sales (24,000 units) Variable expenses: $ 871,200 Variable cost of goods sold Variable selling and administrative $300,000 189,600 489,600 381,600 Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative 221,400 219,000 440,400 Net operating loss 58,800) 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 Units sold Variable costs per unit: 27,000 24,000 Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative $ 7.50 $ 3.10 $ 1.90 $ 7.90

Please show all work! Thanks!!

Answer 1

Requirement 1a)
Unit cost under Absorption costing
Direct Material	7.5
Direct labour	3.1
Variable Manufacturing overheads	1.9
Fixed Manufacturing overheads (221400/27000)	8.2
Absorption costing unit prroduct cost	20.7
Requirement 1b)
Income Statement under Absorption Costing
Sales	$871,200
Cost of Goods sold (300000+221400)	521400
Gross Margin	$349,800
Selling and distribution expense (189600+219000)	408,600
Net operating income	-58,800
Requirement 1c)
Reconciliation Statement:
Net income under Variable cocsting	-60900
Add: Fixed cost deferred to next year (3000 units*8.2)	24600
Net income under Absorption costing	-36300
Requirement 2a)
Income Statement under variable costing
Sales		1,089,000
Less: Variable cost
variable cost of goods sold (30000/27000)*30000	375,000
Variable selling expense (189600/27000)*30000	237,000	612,000
Contribution margin		477,000
Fixed expense:
Fixed Manufacturing overheads		221,400
Fixed selling expense		219,000
Net operating Income		36,600
Requirement 3b)
Income Stataement under Absorption Costing
Sales	$1,089,000
Cost of Goods sold (30000*20.7)	621000
Gross Margin	$468,000
Selling and distribution expense (30000*7.9)+219000	456,000
Net operating income	12,000
Requirement 3c)
Reconciliation Statement:
Net income under variable costing	36,600
Less: Fixed OH released in beginning inventory (3000 units @8.2)	24600
Net income under Absroption costing	12,000