HE AF Problem 18.30 Absorption- and Variable-Costing Income Statements Objective 4 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. 20x1 20x2 Direct labor hours Direct labor cost Fixed manufacturing overhead Variable manufacturing overhead 32,500 $325.000 S130.000 5162.500 46000 S162.000 SI76.000 $198.000 Tim Cimino San Mateo's controller would like to tie variable direct) costing for internal reporting purposes as he believes statements prepared using variable costing are more appropriate for ctitore Window WE AA 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 S1.140.000 $1.520,000 Net sales Cost of goods sold: Finished goods at January 1 Cost of goods manufactured Total available Less: Finished goods at December 31 Unadjusted cost of goods sold Overheal adjustment Cost of goods sold Gross profit Selling expenses Administrative expenses Operating income S 16,000 720,000 $ 736.000 25.000 $ 711.000 12.000 $ 723.000 S417.000 (50,000) 100.000) 107.000 S 25,000 976.000 $1.001,000 14.000 $ 987,000 7,000 $ 994,000 5.326,000 (190,000 (187.XD S 149.000 San Mateo's actual manufacturing data for the two years are as follows Windo a ricing and Profitability Analysis WE AA 20x2 Direct labor hours Direct labor cost Direct materials used Manufacturing overhead 20x1 30,000 $300,000 S140,000 S132.000 42.000 S435.000 $210,000 $175,000 The company's actual inventory balances were as follows: December 31, 20x0 December 31, 20x1 December 31, 20x2 $32,000 $36.000 $18,000 Direct materials Work in process Costs Direct labor hours Finished goods: Costs Direct labor hours $44.000 1.800 534,000 1.400 560,000 2.500 S16.000 00 S25.CO 1.080 $14.000 350 For both years, all adninistrative expenses were fixed, while a portion of the selling expenses resulting from an 6 percent commission on net sales was variable. San Mateo reports any overor underapplied overhead as an adjustment to the cost of goods sold. Required: Required: 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. Answer 2. Describe two advantages of using variable costing rather than absorption costing (CMA adapted)
