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 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 (25,000 units)			$	907,500
Variable expenses:
Variable cost of goods sold	$	307,500
Variable selling and administrative		200,000		507,500
Contribution margin				400,000
Fixed expenses:
Fixed manufacturing overhead		224,000
Fixed selling and administrative		216,000		440,000
Net operating loss			$	( 40,000)

 

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 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		28,000
Units sold		25,000
Variable costs per unit:
Direct materials	$	7.20
Direct labor	$	3.10
Variable manufacturing overhead	$	2.00
Variable selling and administrative	$	8.00

 

Explanation:

1-a.
Absorption costing unit product cost is:

Direct materials	$	7.20
Direct labor		3.10
Variable manufacturing overhead		2.00
Fixed manufacturing overhead ($224,000 ÷ 28,000 units)		8.00
Absorption costing unit product cost	$	20.30

 
b.

The absorption costing income statement is:

Cost of goods sold (25,000 units × $20.30 per unit) = $507,500

Selling and administrative expenses ($216,000 + 25,000 units × $8.00 per unit) = $416,000

 
c.

Units in ending inventory = Units in beginning inventory + Units produced – Units sold = 0 units +  28,000 units – 25,000 units = 3,000 units

Fixed manufacturing overhead cost deferred in inventory under absorption costing (3,000 units × $8.00 per unit) = $24,000

 
3-a.

Sales (31,000 units × $36.30 per unit) = $1,125,300

Variable cost of goods sold (31,000 units × $12.30 per unit) = $381,300

Variable selling and administrative expenses (31,000 units × $8.00 per unit) = $248,000

 
b.

The absorption costing unit product cost will remain at $20.30, the same as in part (1).

Sales (31,000 units × $36.30 per unit) = $1,125,300

Cost of goods sold (31,000 units × $20.30 per unit) = $629,300

Selling and administrative expenses (31,000 units × $8.00 per unit + $216,000) = $464,000

 
c.

Units in ending inventory = Units in beginning inventory + Units produced – Units sold = 3,000 units +  28,000 units – 31,000 units = 0 units

Fixed manufacturing overhead cost released from inventory under absorption costing (3,000 units × $8.00 per unit) = $(24,000)