Help Save & E Tami Tyler opened Tami\'s Creations, Inc., a small manufacturing c

Question

Help Save & E 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 r Ended 798,660 Variable cost of goods sold Variable selling and administrative171,600 s 261,800 Contribution margin Fixed expenses: 365,200 Fixed manufacturing overhead Fixed selling and administrative 205,e00 217.000 422.000 s (56,80ee) 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 proft for the quarter At this point, Ms. Tyler is manufacturing only one product-a swimsuit. Production and cost data relating to the swimsulit for the first quarter follow Prey 5 of 13ENext

Explanation / Answer

1-a The Absorption Costing Unit Product Cost Direct Material 7.40 Direct labour 2.70 Variable Manufacturing overheads 1.80 Fixed Manufacturing overheads 8.20 Absorption costing unit prroduct cost 20.10 Req 1-b: The Absorption Costing Income Statement Sales $798,600 Cost of Goods sold 442200 Gross Margin $356,400 Selling and distribution expense 388,600 Net operating income -32,200 Req 1-c: Reconcilation: Net Income under Variable Costing -56800 Add: Fixed expense deferred during the year (3000 units @$8.20) 24600 Net Income under Absorption income -32200 Req 2-A The Variable Costing Income Statement YEAR 1 Sales 1,015,636 Less: Variable cost    variable cost of goods sold 333,200    Variable selling expense 218,400 551,600 Contribution margin 464,036 Fixed expense:    Fixed Manufacturing overheads 205,000    Fixed selling expense 217,000 Net operating Income 42,036 Re 2-B: The Absorption Costing Income Statement Sales $1,015,636 Cost of Goods sold 562800 Gross Margin $452,836 Selling and distribution expense 435,400 Net operating income 17,436 Req 2-c: Reconciliation: Net income under Variable costing 42036 Less: Fixed Manufacturing expense released in beg. Inventory -24600 Net income under Absorption costing 17436

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