Tami Tyler opened Tami's Creations, Incorporated, a small manufacturing company, atthe beginning of the year. Getting the company through its first quarter of operationsplaced a considerable strain on Ms. Tyler's personal finances. The following incomestatement for the first quarter was prepared by a friend who has just completed a coursein managerial accounting at State University.Tami's Creations, IncorporatedIncome StatementFor the Quarter Ended March 31$ 1,128,000Sales (28,200 units)Variable expenses:Variable cost of goods soldVariable selling and administrativeContribution marginFixed expenses:$ 431,460172,020603,480524,520Fixed manufacturing overheadFixed selling and administrative249,600536,520$ (12,000)286,920Net operating lossMs. Tyler is discouraged over the loss shown for the quarter, particularly because shehad 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 costingand argues that if absorption costing had been used the company probably would havereported at least some profit for the quarter.At this point, Ms. Tyler is manufacturing only one product-acost data relating to the swimsuit for the first quarter follow:suit. Production andUnits producedUnits soldVariable costs per unit:31, 20028,200$ 7.20$ 6.10$ 2.00$ 6.10Direct materialsDirect laborVariable manufacturing overheadVariable selling and administrative 3. During the second quarter of operations, the company again produced 31,200 unitsbut sold 34,200 units. (Assume no change in total fixed costs.)a. What is the company's variable costing net operating income (loss) for the secondquarter?b. What is the company's absorption costing net operating income (loss) for the secondquarter?c. Reconcile the variable costing and absorption costing net operating incomes for thesecond quarter.

Solution 3a: Tami Creations Contribution margin income statementFor the Quarter ended June 30…

Tami's Creations, Incorporated Income Statement For the Quarter Ended March 31 $ 1, es (28,200 units) iable expenses: ariable cost of goods sold $ 431,460 172,020 ariable selling and administrative tribution margin ed expenses: ixed manufacturing overhead ixed selling and administrative 249,600 286,920 operating loss $ ( ler is discouraged over the loss shown for the quarter, particularly because lanned to use the statement as support for a bank loan. Another friend, a Cl s that the company should be using absorption costing rather than variable rgues that if absorption costing had been used the company probably woul ted at least some profit for the quarter. s point, Ms. Tyler is manufacturing only one product-a swimsuit. Production lata relating to the swimsuit for the first quarter follow: ts produced ts sold iable costs per unit: irect materials 31,200 28,200 irect labor ariable manufacturing overhead $ 7.20 $ 6.10 $ 2.00 eriahle selling and administrative ¢ 6 10

Tami's Creations, Incorporated Income Statement For the Quarter Ended March 31 $ 1, es (28,200 units) iable expenses: ariable cost of goods sold $ 431,460 172,020 ariable selling and administrative tribution margin ed expenses: ixed manufacturing overhead ixed selling and administrative 249,600 286,920 operating loss $ ( ler is discouraged over the loss shown for the quarter, particularly because lanned to use the statement as support for a bank loan. Another friend, a Cl s that the company should be using absorption costing rather than variable rgues that if absorption costing had been used the company probably woul ted at least some profit for the quarter. s point, Ms. Tyler is manufacturing only one product-a swimsuit. Production lata relating to the swimsuit for the first quarter follow: ts produced ts sold iable costs per unit: irect materials 31,200 28,200 irect labor ariable manufacturing overhead $ 7.20 $ 6.10 $ 2.00 eriahle selling and administrative ¢ 6 10

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter7: Inventory Cost Flow Assumptions (fifolifo)

Section: Chapter Questions

Problem 7R: Del Rio began Rio Enterprises on January 1 with 200 units of inventory. During the year, 500...

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Del Rio began Rio Enterprises on January 1 with 200 units of inventory. During the year, 500 additional units were purchased, 500 units were sold, and Del ended the year with 200 units. Del is very satisfied with his first year of business although the cost of replacing his inventory rose continually throughout the year. The 500 units sold for a total of 320,000 and the 500 units purchased to replace them cost 256,000, so his cash account has increased by 64,000. Del is concerned however because he has three obligations yet to meet: taxes, dividends, and his wife. Federal and state income taxes will take 40% of his income. His investors are to receive dividends equal to half of any income after taxes are paid. And finally, Del promised his wife a big trip to Hawaii if she let him quit his job as a professor and start his own business. He promised her hed make at least 50,000 after taxes. That will give us 25,000 after paying off the investors. Del kept fairly good records during the year and knows the specific cost of each inventory unit sold. He has prepared the following table to summarize his purchases and sales. Reset the purchase prices to their original values (cells C11 through C14). Suppose Del had purchased 250 units on November 20 rather than 150. Enter 250 in cell C14 and alter column G in the Data Section. Explain what happens to net income under each inventory cost flow assumption and why. Also, what management implications might this have for Del?
Del Rio began Rio Enterprises on January 1 with 200 units of inventory. During the year, 500 additional units were purchased, 500 units were sold, and Del ended the year with 200 units. Del is very satisfied with his first year of business although the cost of replacing his inventory rose continually throughout the year. The 500 units sold for a total of 320,000 and the 500 units purchased to replace them cost 256,000, so his cash account has increased by 64,000. Del is concerned however because he has three obligations yet to meet: taxes, dividends, and his wife. Federal and state income taxes will take 40% of his income. His investors are to receive dividends equal to half of any income after taxes are paid. And finally, Del promised his wife a big trip to Hawaii if she let him quit his job as a professor and start his own business. He promised her hed make at least 50,000 after taxes. That will give us 25,000 after paying off the investors. Del kept fairly good records during the year and knows the specific cost of each inventory unit sold. He has prepared the following table to summarize his purchases and sales. Using a pencil, fill in columns F and G in the Data Section of the worksheet printout at the end of this problem.
Del Rio began Rio Enterprises on January 1 with 200 units of inventory. During the year, 500 additional units were purchased, 500 units were sold, and Del ended the year with 200 units. Del is very satisfied with his first year of business although the cost of replacing his inventory rose continually throughout the year. The 500 units sold for a total of 320,000 and the 500 units purchased to replace them cost 256,000, so his cash account has increased by 64,000. Del is concerned however because he has three obligations yet to meet: taxes, dividends, and his wife. Federal and state income taxes will take 40% of his income. His investors are to receive dividends equal to half of any income after taxes are paid. And finally, Del promised his wife a big trip to Hawaii if she let him quit his job as a professor and start his own business. He promised her hed make at least 50,000 after taxes. That will give us 25,000 after paying off the investors. Del kept fairly good records during the year and knows the specific cost of each inventory unit sold. He has prepared the following table to summarize his purchases and sales. Del has heard that the choice of an inventory cost flow assumption can have a significant effect on net income and taxes. He asks you to show him the differences between the specific identification method and the cost flow assumptions of FIFO, LIFO, and weighted average methods. Review the worksheet FIFOLIFO that follows these requirements. Note that all of the problem data have been entered in the Data Section of the worksheet.
Del Rio began Rio Enterprises on January 1 with 200 units of inventory. During the year, 500 additional units were purchased, 500 units were sold, and Del ended the year with 200 units. Del is very satisfied with his first year of business although the cost of replacing his inventory rose continually throughout the year. The 500 units sold for a total of 320,000 and the 500 units purchased to replace them cost 256,000, so his cash account has increased by 64,000. Del is concerned however because he has three obligations yet to meet: taxes, dividends, and his wife. Federal and state income taxes will take 40% of his income. His investors are to receive dividends equal to half of any income after taxes are paid. And finally, Del promised his wife a big trip to Hawaii if she let him quit his job as a professor and start his own business. He promised her hed make at least 50,000 after taxes. That will give us 25,000 after paying off the investors. Del kept fairly good records during the year and knows the specific cost of each inventory unit sold. He has prepared the following table to summarize his purchases and sales. Examine your completed worksheet and answer the following questions: a. Which inventory cost flow assumption produces the most net income? b. Which inventory cost flow assumption produces the least net income? c. What caused the difference between your answers to a and b? d. Which inventory cost flow assumption produces the highest ending cash balance? e. Which inventory cost flow assumption produces the lowest ending cash balance? f. Does the assumption that produces the highest net income also produce the highest cash balance? Explain. g. As you recall, Del originally used the specific identification method in his initial calculations when he projected 51,600 net income. According to Dels reckoning, that should have left him cash of 25,800 (50% of 51,600) after paying his investors. Why would he only have 3,800 left? Explain. h. Which inventory cost flow assumption would you suggest Del use? Explain.
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