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    Managerial Accounting-Unit Product Cost Under Absorption Costing

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    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 $255,200
    Variable selling and administrative

    171,600

    426,800
    Contribution margin 371,800
    Fixed expenses:
    Fixed manufacturing overhead 210,000
    Fixed selling and administrative

    217,000

    427,000
    Net operating loss

    $( 55,200)

    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 a 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 $1.50
    Variable selling and administrative $7.80

    Requirement 1:
    Complete the following:

    (a)

    Compute the unit product cost under absorption costing. (Round fixed manufacturing overhead rate per unit and final answer to 2 decimal places. Omit the "$" sign in your response.)

    Unit product cost $

    (b)

    Redo the company's income statement for the quarter using absorption costing. (Do not round intermediate calculations. Input all amount as positive value except net loss which should be indicated with a minus sign. Round fixed manufacturing overhead rate per unit to 2 decimal places and final answer to the nearest whole dollar. Omit the "$" sign in your response.)

    (c)

    Reconcile the variable and absorption costing net operating income (loss) figures. (Do not round intermediate calculations. Net losses should be indicated with a minus sign. Round fixed manufacturing overhead rate per unit to 2 decimal places and final answer to the nearest whole dollar. Omit the "$" sign in your response.)

    Requirement 2:
    Under absorption costing, did the company earn a profit for the quarter?

    Requirement 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. (Do not round per unit rates. Input all amount as positive value except net loss which should be indicated with a minus sign. Omit the "$" sign in your response.)

    (b)

    Prepare an income statement for the quarter using absorption costing. (Do not round intermediate calculations. Input all amount as positive value except net loss which should be indicated with a minus sign. Round fixed manufacturing overhead rate per unit to 2 decimal places and final answer to the nearest whole dollar. Omit the "$" sign in your response.)

    (c)

    Reconcile the variable costing and absorption costing net operating incomes. (Do not round intermediate calculations. Net losses should be indicated with a minus sign. Amount to be deducted should be indicated with a minus sign. Round fixed manufacturing overhead rate per unit to 2 decimal places and final answer to the nearest whole dollar. Omit the "$" sign in your response.)

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    Solution Summary

    The solution discusses unit product cost under absorption costing.

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