Question
Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the beginning of the year....
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.
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:
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 (loss) 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 31,600 units but sold 34,600 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.
Answers
1 a) Under absorption costing, fixed manufacturing overhead cost is also included in unit product cost.
Fixed manufacturing overhead per unit = Fixed manufacturing overhead/Units produced
= $252,800/31,600 units = $8 per unit
Calculation of unit product cost under absorption costing (Amounts in $)
Direct materials cost per unit 7.10 Direct labor cost per unit 7.30 Variable manufacturing overhead per unit 1.70 Fixed manufacturing overhead per unit 8.00 Unit product cost 24.10 1 b) Absorption Costing Income Statement for First Quarter (Amounts in $)
Sales (28,600 units*$40) 1,144,000 Cost of goods sold (28,600 units*$24.10) (689,260) Gross Profit 454,740 Selling and Administrative Expenses: Variable selling and administrative expenses (194,480) Fixed selling and administrative expenses (248,260) Total selling and administrative expenses (442,740) Net operating income/(loss) 12,000 Therefore company's absorption costing net operating income for the quarter is $12,000.
1 c) Reconciliation of Net Operating income/ (Loss) (Amounts in $)
Net operating income under absorption costing 12,000 Fixed manufacturing overhead deferred in inventory (3,000 units*$8) (24,000) Fixed manufacturing overhead released 0 Net operating income/(Loss) under variable costing (12,000) 3 a) Variable costing income statement for second quarter (Amounts in $)
Sales (34,600 units*$40) 1,384,000 Variable expenses: Variable cost of goods sold [(7.1+7.3+1.7)*34,600] 557,060 Variable selling and administrative (34,600*6.80) 235,280 792,340 Contribution margin 591,660 Fixed expenses: Fixed manufacturing overhead 252,800 Fixed selling and administrative 248,260 501,060 Net operating income 90,600 Therefore the company’s variable costing net operating income for the second quarter is $90,600.
3 b) Absorption Costing Income Statement for Second Quarter (Amounts in $)
Sales (34,600 units*$40) 1,384,000 Cost of goods sold (34,600 units*$24.10) (833,860) Gross Profit 550,140 Selling and Administrative Expenses: Variable selling and administrative expenses (34,600*6.80) (235,280) Fixed selling and administrative expenses (248,260) Total selling and administrative expenses (483,540) Net operating income/(loss) 66,600 Therefore company's absorption costing net operating income for the second quarter is $66,600.
3 c) Reconciliation of Net Operating income/ (Loss) (Amounts in $)
Net operating income under absorption costing 66,600 Fixed manufacturing overhead deferred in inventory 0 Fixed manufacturing overhead released from inventory 24,000 Net operating income/(Loss) under variable costing 90,600