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 (28,400 units)$1,136,000Variable expenses:Variable cost of goods sold$479,960Variable selling and administrative193,120673,080Contribution margin462,920Fixed expenses:Fixed manufacturing overhead251,200Fixed selling and administrative223,720474,920Net operating loss$( 12,000)

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 producta swimsuit. Production and cost data relating to the swimsuit for the first quarter follow:

Units produced31,400Units sold28,400Variable costs per unit:Direct materials$7.40Direct labor$8.00Variable manufacturing overhead$1.50Variable selling and administrative$6.80

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 31,400 units but sold 34,400 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.

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During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows:

Year 1Year 2Sales (@ $61 per unit)$1,159,000$1,769,000Cost of goods sold (@ $35 per unit)665,0001,015,000Gross margin494,000754,000Selling and administrative expenses*306,000336,000Net operating income$\188,000\$418,000

* $3 per unit variable; $249,000 fixed each year.

The company's $35 unit product cost is computed as follows:

Direct materials$6Direct labor11Variable manufacturing overhead4Fixed manufacturing overhead ($336,000 24,000 units)14Absorption costing unit product cost$35

Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.

Production and cost data for the first two years of operatons are:

Year 1Year 2Units produced24,00024,000Units sold19,00029,000

Required:

1. Using variable costing, what is the unit product cost for both years?

2. What is the variable costing net operating income in Year 1 and in Year 2?

3. Reconcile the absorption costing and the variable costing net operating income figures for each year.