Question

In: Accounting

Security Technology Inc. (STI) is a manufacturer of an electronic control system used in the manufacture...

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 $58 per unit and had sales of 24,150 units in the current year, 2018. STI has no inventory on hand at the beginning of 2018 and is projecting sales of 26,450 units in 2019. STI is planning the same production level for 2019 as in 2018, 25,300 units. The variable manufacturing costs for STI are $19, and the variable selling costs are only $0.80 per unit. The fixed manufacturing costs are $177,100 per year, and the fixed selling costs are $530 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.

Solutions

Expert Solution

Variable costing Income Statement 2018 2019
Sales 1400700 1534100
Less: Variable Expenses
Beginning Invenotry 0 21850
Add: Cost of goods manufactured 480700 480700
Goods available for sale 480700 502550
Less: Ending Inventory 21850 458850 0 502550
Variable cost of goods sold 941850 1031550
Variable selling and administrative cost 19320 21160
Contribution Margin 922530 1010390
Less: Fixed Expenses
Manufacturing Overhead 177100 177100
Selling and administrative 530 177630 530 177630
Net operating income 744900 832760
Full Costing Income Statement Year 1 Year 2
Sales 1400700 1534100
Beginning Invenotry 0 29900
Add: Cost of goods manufactured 657800 657800
Goods available for sale 657800 687700
Less: Ending Inventory 29900
Cost of goods sold 627900 687700
Gross Profit 772800 846400
Selling and administrative cost 19850 21690
Net operating income 752950 824710
Reconcilation Year 1 Year 2
Net income (Variable costing) 744900 Net income (variable costing) 832760
Add: Fixed Manufacturing OH Deffered 8050 Less:Fixed manufacturing OH released in 8050
in Closing Inventories Opening Inventories 824710
Net income (full costing) 752950 Net income (full costing)

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