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 2011 and 2012 were based on the following estimates.

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 2011 and 2012 comparative income statement.

Required:
1. For the year ended December 31, 2012, 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)LO1

Transcribed Image Text:

2011 2012 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