ami Tyler opened Novelty Creations, Inc., a small manufacturing company, at the beginning of 2021. Getting the company through its first two-quarters of operations placed considerable stress on Ms. Bridgton’s personal finances. The following income statement was prepared for the second quarter by a friend who has just completed a course in managerial accounting at a local community college. Novelty Creations, Inc. Income Statement For the Quarter Ended June 30, 2021 Sales (28,000 units) $1,120,000 Variable expenses: Variable cost of goods sold $462,000 Variable selling and administrative 168,000 630,000 Contribution margin 490,000 Fixed expenses: Fixed manufacturing overhead 300,000 Fixed selling and administrative 200,000 500,000 Net operating loss $(10,000) Ms. Tyler was very unhappy 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 designer jumpsuit. Production and cost data relating to the jumpsuit for the above period follow: Units produced 30,000 Units sold 28,000 Variable costs per unit: Direct materials $3.50 Direct labor $12.00 Variable manufacturing overhead $1.00 Variable selling and administrative overhead $6.00 Question: A. Complete the following: Compute the unit product cost under absorption costing. What is the company’s absorption costing net operating income (loss) for the quarter? Reconcile the variable and absorption costing net operating income (loss) figures. B. Was the CPA correct in suggesting that the company really earned a “profit” for the quarter? Explain.
Tami Tyler opened Novelty Creations, Inc., a small manufacturing company, at the beginning of 2021. Getting the company through its first two-quarters of operations placed considerable stress on Ms. Bridgton’s
|
Novelty Creations, Inc. |
||
|
Sales (28,000 units) |
$1,120,000 |
|
|
Variable expenses: |
||
|
Variable cost of goods sold |
$462,000 |
|
|
Variable selling and administrative |
168,000 |
630,000 |
|
Contribution margin |
490,000 |
|
|
Fixed expenses: |
||
|
Fixed manufacturing |
300,000 |
|
|
Fixed selling and administrative |
200,000 |
500,000 |
|
Net operating loss |
$(10,000) |
|
Ms. Tyler was very unhappy 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 designer jumpsuit. Production and cost data relating to the jumpsuit for the above period follow:
|
Units produced |
30,000 |
|
Units sold |
28,000 |
|
Variable costs per unit: |
|
|
Direct materials |
$3.50 |
|
Direct labor |
$12.00 |
|
Variable manufacturing overhead |
$1.00 |
|
Variable selling and administrative overhead |
$6.00 |
Question:
A. Complete the following:
-
- Compute the unit product cost under absorption costing.
- What is the company’s absorption costing net operating income (loss) for the quarter?
- Reconcile the variable and absorption costing net operating income (loss) figures.
B. Was the CPA correct in suggesting that the company really earned a “profit” for the quarter? Explain.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
