Tami Tyler opened Tamis Creations Inc a small manufacturing

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

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:

Required:

3. During the second quarter of operations, the company again produced 31,500 units but sold 34,500 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.

Solution

3a)

selling price per unit =1140000/28500=$ 40

Variable manufacturing cost per unit = 7.4 +7.8+ 1.7 = 16.90

Variable costing Income statement

for the quarter endingJune 30

b)Fixed manufacturing overhead per unit = 283500/31500=9 per unit

cost of goods sold per unit = variable manufacturing cost per unit +fixed manufacturing overhead per unit

=16.9+9 =25.9

c)

**Beginning inventory = 31500-28500 = 3000 units