Absorption- and Variable-Costing Income Statements

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 Mateos predetermined overhead rates for 20x1 and 20x2 were based on the following estimates.

		20x1		20x2
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 Mateos 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 Mateos management team, Cimino plans to convert the companys income statement from absorption costing to variable costing. He has gathered the following information for this purpose, along with a copy of San Mateos 20x1 and 20x2 comparative income statement.

San Mateo Optics, Inc.
Comparative Income Statement
For the Years 20x1 and 20x2
		20x1			20x2
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
Unadjusted cost of goods sold		$ 711,000			$ 987,000
Overhead adjustment		12,000			7,000
Cost of goods sold		$ 723,000			$ 994,000
Gross profit		$ 417,000			$ 526,000
Selling expenses		(150,000)			(190,000)
Administrative expenses		(160,000)			(187,000)
Operating income		$ 107,000			$ 149,000

San Mateos actual manufacturing data for the two years are as follows:

		20x1		20x2
Direct labor hours		30,000		42,000
Direct labor cost		$300,000		$435,000
Direct materials used		$140,000		$210,000
Manufacturing overhead		$132,000		$175,000

The companys actual inventory balances were as follows:

		December 31, 20x0		December 31, 20x1		December 31, 20x2
Direct materials		$32,000		$36,000		$18,000
Work in process:
Costs		$44,000		$34,000		$60,000
Direct labor hours		1,800		1,400		2,500
Finished goods:
Costs		$16,000		$25,000		$14,000
Direct labor hours		700		1,080		550

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 underapplied overhead as an adjustment to the cost of goods sold.

Required:

Question Content Area

1. For the year ended December 31, 20x2, 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. Enter all answers as positive amounts.

Administrative expenseContribution marginFactory overheadFinished goods inventory, 1/1Net sales		$- Select -
Variable costs:
Administrative expenseContribution marginFactory overheadFinished goods inventory, January 1Finished goods inventory, December 31	$- Select -
Administrative expenseContribution marginFactory overheadNet salesWIP inventory, January 1	- Select -
Administrative expenseContribution marginFactory overheadManufacturing costsNet sales	- Select -
Total available	$fill in the blank 91647a011fe2f8e_9
Administrative expenseContribution marginFactory overheadFinished goods inventory, December 31Net sales	- Select -
Administrative expenseContribution marginFactory overheadNet salesWIP inventory, December 31	- Select -
Administrative expenseContribution marginFactory overheadNet salesVariable manufacturing costs	$- Select -
Administrative expenseContribution marginFactory overheadNet salesVariable selling costs	- Select -
Total variable costs		fill in the blank 91647a011fe2f8e_18
Contribution marginOperating income		$- Select -
Fixed costs:
Contribution marginFactory overheadFinished goods inventory, January 1Finished goods inventory, December 31Manufacturing costs	$- Select -
Contribution marginFinished goods inventory, January 1Finished goods inventory, December 31Manufacturing costsNet salesSelling expense	- Select -
Administrative expenseContribution marginFinished goods inventory, January 1Finished goods inventory, December 31Manufacturing costs	- Select -
Total fixed costs		fill in the blank 91647a011fe2f8e_27
Contribution marginOperating income		$- Select -
Finished goods inventory, January 1:
Finished goods inventory, January 1Finished goods inventory, December 31Inventory using full costWIP inventory, January 1WIP inventory, December 31	$- Select -
Less: Contribution marginLess: Factory overheadLess: Fixed overheadLess: Manufacturing costsLess: Variable manufacturing costs	- Select -
	$fill in the blank 91647a011fe2f8e_34

Question Content Area

2. Select an advantage of using variable costing rather than absorption costing. (CMA adapted)