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:

Units produced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     30,000
Units sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     28,000
Variable costs per unit:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $3.50
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $12.00
Variable manufacturing overhead . . . . . . . . . . . . . . .           $1.00
Variable selling and administrative . . . . . . . . . . . . .             $6.00

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 (loss) for the quarter?

c. Reconcile the variable and absorption costing net operating income (loss) figures.

2. Was the CPA correct in suggesting that the company really earned a “profit” for the quarter? Explain.

3. During the second quarter of operations, the company again produced 30,000 units but sold 32,000 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.

Transcribed Image Text:

Tami's Creations, Inc. Income Statement For the Quarter Ended March 31 Sales (28,000 units) . Variable expenses: Variable cost of goods sold...... $1,120,000 $462,000 Variable selling and administrative 168,000 630,000 490,000 Contribution margin Fixed expenses: Fixed manufacturing overhead.. Fixed selling and administrative.. 300,000 200,000 500,000 Net operating loss $ (10,000)