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Absorption- and Variable-Costing Income Statements San Mateo Optics, Inc., specializes in manufacturing lenses for large telescopes...

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.

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 $198,000

   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 Optics, Inc.
Comparative Income Statement
For the Years 20x1 and 20x2
20x1 20x2
Net sales $1,140,000 $1,520,000
Cost of goods sold:
  Finished goods at January 1 $ 16,000 $ 25,000
  Cost of goods manufactured 720,000 976,000
Total available $ 736,000 $1,001,000
Less: Finished goods at December 31 25,000 14,000
  Unadjusted cost of goods sold $ 711,000 $ 987,000
Overhead adjustment 12,000 7,000
  Cost of goods sold $ 723,000 $ 994,000
Gross profit $ 417,000 $ 526,000
Selling expenses (150,000) (190,000)
Administrative expenses (160,000) (187,000)
  Operating income $ 107,000 $ 149,000

San Mateo’s actual manufacturing data for the two years are as follows:

20x1 20x2
Direct labor hours 30,000 42,000
Direct labor cost $300,000 $435,000
Direct materials used $140,000 $210,000
Manufacturing overhead $132,000 $175,000

The company’s actual inventory balances were as follows:

December 31,
20x0
December 31,
20x1
December 31,
20x2
Direct materials $32,000 $36,000 $18,000
Work in process:
  Costs $44,000 $34,000 $60,000
  Direct labor hours 1,800 1,400 2,500
Finished goods:
  Costs $16,000 $25,000 $14,000
  Direct labor hours 700 1,080 550

   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.

San Mateo Optics, Inc.
Variable-Costing Income Statement
For the Year Ended December 31, 20x2
$
Variable costs:
$
Total available $
$
Total variable costs
$
Fixed costs:
$
Total fixed costs
$
Finished goods inventory, January 1:
$
$

Solutions

Expert Solution

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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