ACCT 2230 Chapter Notes - Chapter 8: Activity-Based Costing, Earnings Before Interest And Taxes, Fixed Cost

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17 Dec 2011

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Absorption costing is generally used for external financial reports. Variable costing, is preferred by some managers for internal decision making and must be used when an income statement is prepared in the contribution format. Normally absorption and variable costing produce different figures for operating income, & the difference can be quite large. Absorption costing treats all manufacturing costs as product costs (regardless if fixed or variable) Variable costing only those manufacturing costs that vary w/ output are treated as product costs. Selling & administrative expense: are rarely treated as product costs. Always treated as period costs (expenses) and deducted from revenues as incurred. The absorption costing income statement makes no distinctions between fixed and variable costs. Variable costing approach to costing units of products blends very well with the contribution approach to the income statement therefore variable costing data is useful for cvp computations. Effect of changes in production on operating income.

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***The last person who answered, did not answer the questions in format. Please provide the answers for the required fields on the chart. Label the answers please or list them in a chart like the ones provided in the question.***

*CHECK NUMBERS; PLEASE PROVIDE AN EXPLAINATION FOR EACH AND ANSWER EACH PART FOR QUESTIONS #1-#3 WITH FORMULAS*

Tami Tyler opened Tamiâs 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. Tylerâs 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.

Tamiâs Creations, Inc. Income Statement For the Quarter Ended March 31
Sales (22,000 units)			$	798,600
Variable expenses:
Variable cost of goods sold	$	257,400
Variable selling and administrative expenses		176,000		433,400
Contribution margin				365,200
Fixed expenses:
Fixed manufacturing overhead		202,500
Fixed selling and administrative expenses		218,000		420,500
Net operating loss			$	( 55,300	)

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		25,000
Units sold		22,000
Variable costs per unit:
Direct materials	$	7.20
Direct labor	$	2.70
Variable manufacturing overhead	$	1.80
Variable selling and administrative	$	8.00

Required:

1. Complete the following:

a. Compute the unit product cost under absorption costing. (Round your intermediate and final answers to 2 decimal places.)

Unit Product Cost:_______________

b. Redo the companyâs income statement for the quarter using absorption costing. (Round your intermediate calculations to 2 decimal places.)

Tamiâs Creations, Inc.
Absorption Costing Income Statement
	Total


	0

Net operating income (loss)	$0

c. Reconcile the variable and absorption costing net operating income (loss) figures. (Round your intermediate calculations to 2 decimal places.)

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes (Losses)
Variable costing net operating income (loss)

Absorption costing net operating income (loss)

3. During the second quarter of operations, the company again produced 25,000 units but sold 28,000 units. (Assume no change in total fixed costs.)

a. Prepare a contribution format income statement for the quarter using variable costing. (Round your intermediate calculations to 2 decimal places.)

Tamiâs Creations, Inc.
Variable Costing Income Statement

Variable expenses:



		0
		0
Fixed expenses:



		0
		$0

b. Prepare an income statement for the quarter using absorption costing. (Round your intermediate calculations to 2 decimal places.)

Tamiâs Creations, Inc.
Absorption Costing Income Statement
	Total


	0

	$0

c. Reconcile the variable costing and absorption costing net operating incomes. (Round your intermediate calculations to 2 decimal places.)

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes (Losses)
Variable costing net operating income (loss)

Absorption costing net operating income (loss)

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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.

Tamiâs Creations, Inc. Income Statement For the Quarter Ended March 31
Sales (23,000 units)			$	834,900
Variable expenses:
Variable cost of goods sold	$	271,400
Variable selling and administrative		177,100		448,500
Contribution margin				386,400
Fixed expenses:
Fixed manufacturing overhead		213,200
Fixed selling and administrative		220,000		433,200
Net operating loss			$	( 46,800)

At this point, Ms. Tyler is manufacturing only one productâa swimsuit. Production and cost data relating to the swimsuit for the first quarter follow:


Units produced	26,000
Units sold	23,000
Variable costs per unit:
Direct materials		$	7.20
Direct labor		$	3.00
Variable manufacturing overhead		$	1.60
Variable selling and administrative		$	7.70

Required:

1. Complete the following:

a. Compute the unit product cost under absorption costing.

b. What is the companyâs 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 26,000 units but sold 29,000 units. (Assume no change in total fixed costs.)

a. What is the companyâs variable costing net operating income (loss) for the second quarter?

b. What is the companyâs 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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ACCT 2230 Chapter Notes - Chapter 8: Activity-Based Costing, Earnings Before Interest And Taxes, Fixed Cost

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