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 $48 per unit and had sales of 24,950 units in the current year, 2018. STI has no inventory on hand at the beginning of 2018 and is projecting sales of 28,850 units in 2019. STI is planning the same production level for 2019 as in 2018, 26,900 units. The variable manufacturing costs for STI are $19, and the variable selling costs are only $0.30 per unit. The fixed manufacturing costs are $215,200 per year, and the fixed selling costs are $690 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

1. Unit product cost under full costing = VMOH per unit + FMOH per unit = $ 19 + $ 215,200 / 26,900 units = $ 27

Security Technology Inc. Full Costing Income Statement
	2018	2019
Units	24,950	28,850
Sales Revenue ( $ 48 per unit sold)	$ 1,197,600	$ 1,384,800
Less: Cost of Goods Sold ( $ 27 per unit sold )	673,650	778,950
Gross Profit	523,950	605,850
Less: Selling Costs
Variable	7,485	8,655
Fixed	690	690
Total Selling Costs	8,175	9,345
Operating Income ( Loss )	$ 515,775	596,505

2.

Security Technologies Inc. Variable Costing Income Statement
	2018	2019
Units	24,950	28,850
Sales Revenue ( $ 48 per unit sold)	$ 1,197,600	$ 1,384,800
Less: Variable Costs
Cost of Goods Sold ( $ 19 per unit sold)	474,050	548,150
Selling Costs ( $ 0.30 per unit )	7,485	8,655
Total Variable Costs	$ 481,535	$ 556,805
Contribution Margin	716,065	827,995
Fixed Costs
Manufacturing	215,200	215,200
Selling	690	690
Total Fixed Costs	215,890	215,890
Operating Income ( Loss )	$ 500,175	$ 612,105

3.

	2018	2019
Full Costing Operating Income ( Loss )	$ 515,775	596,505
Add: FMOH released from beginning inventory ( $ 8 per unit of inventory ), 0 units; 1,950 units	0	15,600
Less: FMOH deferred in ending inventory ( $ 8 per unit of inventory ) 1,950 units; 0 units	( 15,600)	0
Variable Costing Operating Income ( Loss )	$ 500,175	$ 612,105