Absorption- and Variable-Costing Income Statements San Mateo Optics, Inc., speci
ID: 2531273 • Letter: A
Question
Absorption- and Variable-Costing Income Statements
San Mateo Optics, Inc., specializes in manufacturing lenses for large telescopes and cameras used in space exploration. As the specifications for the lenses are determined by the customer and vary considerably, the company uses a job-order costing system.
Manufacturing overhead is applied to jobs on the basis of direct labor hours, utilizing the absorption- or full-costing method. San Mateo’s predetermined overhead rates for 20x1 and 20x2 were based on the following estimates.
Jim Cimino, San Mateo’s controller, would like to use variable (direct) costing for internal reporting purposes as he believes statements prepared using variable costing are more appropriate for making product decisions. In order to explain the benefits of variable costing to the other members of San Mateo’s management team, Cimino plans to convert the company’s income statement from absorption costing to variable costing. He has gathered the following information for this purpose, along with a copy of San Mateo’s 20x1 and 20x2 comparative income statement.
San Mateo’s actual manufacturing data for the two years are as follows:
The company’s actual inventory balances were as follows:
For both years, all administrative expenses were fixed, while a portion of the selling expenses resulting from an 8 percent commission on net sales was variable. San Mateo reports any overor underapplied overhead as an adjustment to the cost of goods sold.
Required:
1. For the year ended December 31, 20x2, prepare the revised income statement for San Mateo Optics, Inc., utilizing the variable-costing method. Be sure to include the contribution margin on the revised income statement. Enter all answers as positive amounts.
20x1 20x2 Direct labor hours 32,500 44,000 Direct labor cost $325,000 $462,000 Fixed manufacturing overhead $130,000 $176,000 Variable manufacturing overhead $162,500 $198,000Explanation / Answer
San Mateo Optics, Inc.
Variable-Costing Income Statement
For the Year Ended December 31, 20x2
Net sales.................................................................................. $1,520,000
Variable costs:
Finished goods inventory, January 1........................ $ 20,680
Work-in-process inventory, January 1...................... 28,400
Manufacturing costs...................................................... 834,000
Total available............................................................. $883,080
Finished goods inventory, December 31.................. 11,800
Work-in-process inventory, December 31................ 50,000
Variable manufacturing costs................................. $821,280
Variable selling costs..................................................... 121,600
Total variable costs.................................................... 942,880
Contribution margin............................................................. $ 577,120
Fixed costs:
Factory overhead............................................................ $175,000
Selling expenses............................................................. 68,400
Administrative expenses.............................................. 187,000
Total fixed costs......................................................... 430,400
Operating income................................................................. $ 146,720
Finished goods inventory, January 1:
Inventory using full cost............................................... $ 25,000
Less: Fixed overhead (1,080 hrs. × $4)..................... 4,320
$ 20,680
Fixed overhead rate:
20x1: $130,000/32,500 = $4 per hour
20x2: $176,000/44,000 = $4 per hour
Work-in-process inventory, January 1:
Inventory using full cost............................................... $ 34,000
Less: Fixed overhead (1,400 hrs. × $4)..................... 5,600
$ 28,400
Manufacturing costs:
Direct materials................................................................ $210,000
Direct labor....................................................................... 435,000
Variable overhead (42,000 hrs. × $4.50).................... 189,000
$834,000
Variable overhead rate = $198,000/44,000 = $4.50 per hour
Finished goods inventory, December 31:
Inventory using full cost............................................... $ 14,000
Less: Fixed overhead (550 hrs. × $4)......................... 2,200
$ 11,800
Work-in-process inventory, December 31:
Inventory using full cost............................................... $ 60,000
Less: Fixed overhead (2,500 hrs. × $4)..................... 10,000
$ 50,000
Variable selling costs:
Net sales × Commission rate = $1,520,000 × 0.08 = $121,600
Fixed selling expenses:
Total selling expenses................................................... $190,000
Less: Variable selling costs......................................... 121,600
$ 68,400
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