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 Mateo's predetermined overhead rates for 20x1 and 20x2 were based on the following estimates. Direct labor hours 20x1 20x2 32,500 44,000 Direct labor cost Fixed manufacturing overhead $325,000 $462,000 $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 20x1 and 20x2 comparative income statement. San Mateo Optics, Inc. Comparative Income Statement For the Years 20x1 and 20x2 20x2 20x1 $1,140,000 $1,520,000 Net sales 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 Overhead adjustment Cost of goods sold $ 711,000 $ 987,000 12,000 7,000 $ 723,000 $ 994,000 Gross profit Selling expenses $ 417,000 $ 526,000 (150,000) Administrative expenses (160,000) (190,000) (187,000) Operating income $ 107,000 $ 149,000 San Mateo's actual manufacturing data for the two years are as follows: