Manacc Problem 7-13

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Solution to Problem 7-13

1. Computation

a. Unit product cost under absorption costing
Per unit
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.50 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.00 Variable manufacturing overhead . . . . . . . . . . . . 1.00 Fixed manufacturing overhead . . . . . . . . . . . . . . . 10.00 Unit product cost . . . . . . . . . . . . . . . . . . . . . . . . . . . $26.50

b. Income statement for the quarter using variable costing

Tami's Creations, Inc.
Income Statement
For the Quarter Ended March 31

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,120,000 Cost of goods sold:
Beginning inventory . . . . . . . . . . . . . . . . . . . . . . $- Cost of goods manufactured . . . . . . . . . . . . . . . 795,000 Goods available for sale . . . . . . . . . . . . . . . . . . . 795,000 Ending inventory . . . . . . . . . . . . . . . . . . . . . . . . . 53,000 742,000 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378,000 Selling and administrative expenses . . . . . . . . . . 368,000 Net operating income . . . . . . . . . . . . . . . . . . . . . . . $10,000

c. Reconciliation

Net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . $(10,000) Fixed manufacturing overhead cost deferred in
inventory (absorption costing) . . . . . . . . . . . . . . . 20,000 Net operating iincome (absorption costing) . . . . $10,000

2. Was the CPA correct in suggesting that the company earned a profit for the quarter?

" The CPA was correct in saying that the company earned a profit if the absorption costing...
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