Question

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 (22,000 units) $ 798,600
Variable expenses:
Variable cost of goods sold $ 257,400
Variable selling and administrative 173,800 431,200
Contribution margin 367,400
Fixed expenses:
Fixed manufacturing overhead 212,500
Fixed selling and administrative 219,000 431,500
Net operating loss $ ( 64,100)

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 25,000
Units sold 22,000
Variable costs per unit:
Direct materials $ 7.20
Direct labor $ 2.90
Variable manufacturing overhead $ 1.60
Variable selling and administrative $ 7.90

Compute the unit product cost under absorption costing.

Answer 1

Answer:

Instructions are listed below.

Explanation:

Giving the following information:

Units produced 25,000

Units sold 22,000

Variable costs per unit:

Direct materials $ 7.20

Direct labor $ 2.90

Variable manufacturing overhead $ 1.60

Variable selling and administrative $ 7.90

Fixed expenses:

Fixed manufacturing overhead 212,500

Fixed selling and administrative 219,000

Under absorption costing, the fixed manufacturing costs get allocated to the product cost. The cost of goods sold is now composed of direct material, direct labor, variable overhead, and unitary fixed overhead.

First, we need to calculate the unitary fixed overhead and then the total unitary cost.

Unitary fixed costs= 212,500/25,000= $8.5 per unit

Unitary cost= 7.2 + 2.9 + 1.6 + 8.5= $20.2

Now, we can recalculate the income statement:

Sales= 22,000*$36.3= 798,600

COGS= (22,000*20.2)= (444,400)

Gross profit= 354,200

Variable selling and administrative= (7.90*22,000)= (173,800)

Fixed selling and administrative= (219,000)

Net operating profit= (38,600)

It doesn't show a profit, but at least the loss is smaller.