Portland 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 cost system. Factory overhead is applied to jobs on the basis of direct labor hours, utilizing the absorption (full) costing method. Port¬

land's predetermined overhead rates for 2000 and 2001 were based on the following estimates.

Jim Bradford, Portland's controller, would like to use variable (direct) costing for internal reporting purposes as he believes statements prepared using variable costing are more ap¬
propriate for making product decisions. In order to explain the benefits of variable costing to the other members of Portland's management team, Bradford plans to convert the com¬
pany's income statement from absorption costing to variable costing. He has gathered the following information for this purpose, along with a copy of Portland's 2000-2001 compar¬
ative income statement.

Portland's actual manufacturing data for the two years are presented below.

The company's actual inventory balances were:.

For both years, all administrative costs were fixed, while a portion of the selling ex¬
pense resulting from an 8% commission on net sales was variable. Portland reports any overor underapplied overhead as an adjustment to the cost of goods sold.
Required:
1. For the year ended December 31, 2001, prepare the revised income statement for Port¬
land Optics Inc., utilizing the variable costing method. Be sure to include the contribu¬
tion margin on the revised income statement 2. Describe two advantages of using variable costing rather than absorption costing.

Transcribed Image Text:

2000 2001 Direct labor hours 32,500 44,000 Direct labor cost $325,000 $462,000 Fixed factory overhead 130,000 176,000 Variable factory overhead 162,500 198,000