Question

Security Technology Inc. (STI) is a manufacturer of an electronic control system used in the manufacture of certain special-duty auto transmissions used primarily for police and military applications. The part sells for $57 per unit and had sales of 24,100 units in the current year, 2018. STI has no inventory on hand at the beginning of 2018 and is projecting sales of 26,300 units in 2019. STI is planning the same production level for 2019 as in 2018, 25,200 units. The variable manufacturing costs for STI are $18, and the variable selling costs are only $0.70 per unit. The fixed manufacturing costs are $201,600 per year, and the fixed selling costs are $520 per year. Required: 1. Prepare an income statement for each year using full costing. 2. Prepare an income statement for each year using variable costing. 3. Prepare a reconciliation of the difference each year in the operating income resulting from the full and variable costing methods.

Answer 1

	Full	Variable
	Costing	Costing
Variable manufacturing costs	18	18
Fixed manufacturing costs ($201600/25200)	8	-
Per unit manufacturing cost $	26	18

1.

Security Technology Inc.
Full Costing Income Statement
	2018		2019
Sales		1373700		1499100
Less: Cost of goods sold
Beginning inventory	0		28600
Add cost of production	655200		655200
Available for sale	655200		683800
Less ending inventory	28600		0
Cost of goods sold		626600		683800
Gross margin		747100		815300
Less: Selling and administrative costs
Variable	16870		18410
Fixed	520		520
		17390		18930
Operating income		729710		796370

2.

Security Technology Inc.
Variable Costing Income Statement
	2018		2019
Sales		1373700		1499100
Less: Cost of goods sold
Beginning inventory	0		19800
Add cost of production	453600		453600
Available for sale	453600		473400
Less ending inventory	19800		0
Cost of goods sold	433800		473400
Variable selling and administrative costs	16870		18410
		450670		491810
Contribution margin		923030		1007290
Fixed manufacturing costs	201600		201600
Less: Selling and administrative costs
Fixed	520		520
		202120		202120
Operating income		720910		805170

3.

Security Technology Inc
Reconciliation
	2018	2019
Change in inventory units	1100	-1100
Multiply times fixed overhead rate	8800	-8800
Difference in operating income	8800	-8800