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 (21,000 units)			$	762,300
Variable expenses:
Variable cost of goods sold	$	245,700
Variable selling and administrative		165,900		411,600
Contribution margin				350,700
Fixed expenses:
Fixed manufacturing overhead		196,800
Fixed selling and administrative		216,000		412,800
Net operating loss			$	( 62,100)

  

    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 would probably 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		24,000
Units sold		21,000
Variable costs per unit:
Direct materials	$	7.10
Direct labor	$	2.80
Variable manufacturing overhead	$	1.80
Variable selling and administrative	$	7.90

  

Required:

1.	Complete the following:

  

a.	Compute the unit product cost under absorption costing. (Round your intermediate and final answers to 2 decimal places.)

         

b.	Redo the company’s income statement for the quarter using absorption costing. (Round your intermediate calculations to 2 decimal places.)

               

         

c.	Reconcile the variable and absorption costing net operating income (loss) figures. (Round your intermediate calculations to 2 decimal places.)

        

        

Answer 1

a) Compute the unit product cost under absorption costing. (Round your intermediate and final answers to 2 decimal places.)

Direct material	7.10
Direct labour	2.80
Variable manufacturing overhead	1.80
Fixed manufacturing overhead (196800/24000)	8.20
Unit product cost	19.90

Income statement

Sales	762300
Cost of goods sold (21000*19.90)	417900
Gross margin	344400
Selling and administrative expense (165900+216000)	381900
Net operating income	-37500

Reconciliation

Variable operating income (loss)	-62100
Add: Fixed manufacturing overhead deferred in ending inventory (3000*8.20)	24600
Absorption costing income (loss)	-37500