Question

PROBLEM 6-23 Absorption and Variable Costing; Production Constant, Sales Fluctuate [L06-1, L06-2, L06-3] 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. $1,120,000 Tami's Creations, Inc. Income Statement For the Quarter Ended March 31 Sales (28,000 units) ..... Variable expenses: Variable cost of goods sold ........ $462,000 Variable selling and administrative .. 168,000 Contribution margin .......... Fixed expenses: Fixed manufacturing overhead ... 300,000 Fixed selling and administrative ...... 200,000 Net operating loss ........ 630,000 490,000 ..... $ 500,000 (10,000 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 com- pany 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: 30,000 28,000 Units produced .......... Units sold ................. Variable costs per unit: Direct materials ...... Direct labor ............................. Variable manufacturing overhead ............ Variable selling and administrative ............ $3.50 $12.00 $1.00 $6.00 Required: 1. Complete the following: a. Compute the unit product cost under absorption costing. b. Redo the company's income statement for the quarter using absorption costing. 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. Prepare a contribution format income statement for the quarter using variable costing. b. Prepare an income statement for the quarter using absorption costing. c. Reconcile the variable costing and absorption costing net operating incomes.