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 $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.

Answer 1

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)