1. Last month a manufacturing company's profit was GHS2,000, calculated using absorption costing principles. If marginal costing principles have been used, a loss of GHS3,000 would have occurred. The company's fixed production cost is GHS2 per unit. Sales last month were 10,000 units. What was last month's production (in units)?

A. 7,500

B. 9,500

C. 10,500

D. 12,500

•Explain the difference between variable and full costing.

•Explain why income calculated under full absorption costingwill be greater than income calculated under variable costing whenproduction exceeds sales.

•Explain how a manufacturing company can "bury" fixedmanufacturing costs in ending inventory under full absorptioncosting.

PROBLEM 6-23 Absorption and Variable Costing; Production Constant, Sales Fluctuate [L06-1, L06-2, L06-3] 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. $1,120,000 Tami's Creations, Inc. Income Statement For the Quarter Ended March 31 Sales (28,000 units) ..... Variable expenses: Variable cost of goods sold ........ $462,000 Variable selling and administrative .. 168,000 Contribution margin .......... Fixed expenses: Fixed manufacturing overhead ... 300,000 Fixed selling and administrative ...... 200,000 Net operating loss ........ 630,000 490,000 ..... $ 500,000 (10,000 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 com- pany 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 swimsuit. Production and cost data relating to the swimsuit for the first quarter follow: 30,000 28,000 Units produced .......... Units sold ................. Variable costs per unit: Direct materials ...... Direct labor ............................. Variable manufacturing overhead ............ Variable selling and administrative ............ $3.50 $12.00 $1.00 $6.00 Required: 1. Complete the following: a. Compute the unit product cost under absorption costing. b. Redo the company's income statement for the quarter using absorption costing. c. Reconcile the variable and absorption costing net operating income (loss) figures. 2. Was the CPA correct in suggesting that the company really earned a "profit" for the quarter? Explain. 3. During the second quarter of operations, the company again produced 30,000 units but sold 32,000 units. (Assume no change in total fixed costs.) a. Prepare a contribution format income statement for the quarter using variable costing. b. Prepare an income statement for the quarter using absorption costing. c. Reconcile the variable costing and absorption costing net operating incomes.

Diego Company manufactures one product that is sold for $73 perunit in two geographic regions—the East and West regions. Thefollowing information pertains to the company’s first year ofoperations in which it produced 44,000 units and sold 39,000units.

Variable costs per unit: Manufacturing: Direct materials $ 23Direct labor $ 16 Variable manufacturing overhead $ 2 Variableselling and administrative $ 4 Fixed costs per year: Fixedmanufacturing overhead $ 748,000 Fixed selling and administrativeexpenses $ 400,000

The company sold 29,000 units in the East region and 10,000units in the West region. It determined that $180,000 of its fixedselling and administrative expenses is traceable to the Westregion, $130,000 is traceable to the East region, and the remaining$90,000 is a common fixed cost. The company will continue to incurthe total amount of its fixed manufacturing overhead costs as longas it continues to produce any amount of its only product.

What is the company’s net operating income (loss) underabsorption costing? 7. What is the amount of the difference betweenthe variable costing and absorption costing net operating incomes(losses)? Difference of Variable Costing and Absorption Costing NetOperating Incomes Variable costing net operating income (loss)Absorption costing net operating income (loss) Add: Fixedmanufacturing overhead cost deferred in inventory under absorptioncosting Add: Fixed manufacturing overhead cost released frominventory under absorption costing Deduct: Fixed manufacturingoverhead cost deferred in inventory under absorption costingDeduct: Fixed manufacturing overhead cost released from inventoryunder absorption costing which one? 8. What is the company’sbreak-even point in unit sales? 9. If the sales volumes in the Eastand West regions had been reversed, what would be the company’soverall break-even point in unit sales? 10. What would have beenthe company’s variable costing net operating income (loss) if ithad produced and sold 39,000 units? 11. What would have been thecompany’s absorption costing net operating income (loss) if it hadproduced and sold 39,000 units? 12. If the company produces 5,000fewer units than it sells in its second year of operations, willabsorption costing net operating income be higher or lower thanvariable costing net operating income in Year 2? Higher or Lower13. Prepare a contribution format segmented income statement thatincludes a Total column and columns for the East and West regions.Income Statement Total Company East West 0 0 $0