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 2013 and 2014 were based on the following estimates.
2013 2014
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 2013 and 2014 comparative income statement.
San Mateo Optics, Inc.
Comparative Income Statement
For the Years 2013 and 2014
2013 2014
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

San Mateo's actual manufacturing data for the two years are as follows:
2013 2014
Direct labor hours..............................30,000...................42,000
Direct labor cost..............................$300,00..................$435,000
Direct materials used........................$140,000...............$210,000
Manufacturing overhead ....................$132,000...............$175,000
The company's actual inventory balances were as follows:

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 under applied overhead as an adjustment to the cost of goods sold.
Required:
1. For the year ended December 31, 2014, 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.
2. Describe two advantages of using variable costing rather than absorption costing. (CMA adapted)

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2013 2014 Unadjusted cost of goods sold Overhead adjustment Cost of goods sold Gross profit Selling expenses Administrative expenses $711,000 12,000 $ 723,000 $417,000 (150,000) (160,000) $ 107,000 $ 987,000 7,000 $ 994,000 S 526,000 (190,000) (187,000) $ 149,000 Operating income ber 3, 2013 December 31. Decem December 31 2014 $18,000 2012 $32,000 $44,000 Direct materials Work in process: $36,000 Costs Direct labor hours $34,000 1,400 $60,000 1,800 2,500 Finished goods: Costs Direct labor hours $16,000 $25,000 1,080 $14,000 700 550