Mark Hancock Incorporated manufactures a specialized surgical instrument called the HAN-20. The firm has grown rapidly in recent years because of the products low price and high quality. However, sales have declined this year primarily due to increased competition and a decrease in the surgical procedures for which the HAN-20 is used. The firm is concerned about the decline in sales and has hired a consultant to analyze the firms profitability. The consultant was provided the following information:

	2021	2022
Sales (units)	4,400	4,000
Production	4,600	3,520
Budgeted production and sales	5,200	4,600
Beginning inventory	800	1,000
Data per unit (all variable)
Price	$ 2,095	$ 1,995
Direct materials and labor	1,200	1,200
Selling costs	125	125
Fixed costs
Manufacturing overhead	$ 910,000	$ 805,000
Selling and administrative	120,000	120,000

Top management at Hancock explained to the consultant that a difficult business environment for the firm in 2021 and 2022 had caused the firm to reduce its price and production levels and reduce its fixed manufacturing costs in response to the decline in sales. Even with the price reduction, there was a decline in sales in both years. This led to an increase in inventory in 2021, which the firm was able to reduce in 2022 by further reducing the level of production. In both years, Hancocks actual production was less than the budgeted level so that the overhead rate for fixed overhead, calculated from budgeted production levels, was too low, and a production volume variance was calculated to adjust cost of goods sold for the underapplied fixed overhead (the calculation of the production volume variance is explained fully in Chapter 15 and reviewed briefly below).

The production volume variance for 2021 was determined from the fixed overhead rate of $175 per unit ($910,000/5,200 budgeted units). Because the actual production level was 600 units short of the budgeted level in 2021 (5,200 4,600), the amount of the production volume variance in 2021 was 600 $175 = $105,000. The production volume variance is underapplied because the actual production level is less than budgeted, and the production volume variance is therefore added back to cost of goods sold to determine the amount of cost of goods sold in the full costing income statement. The full costng income statement for 2021 is shown below:

Sales		9,218,000
Cost of goods sold:
Beginning inventory	$ 1,100,000
Cost of goods produced	6,325,000
Cost of goods available for sale	$ 7,425,000
Less ending inventory	1,375,000
Cost of goods sold:		$ 6,050,000
Plus unfavorable production volume variance		105,000
Adjusted cost of goods sold		$ 6,155,000
Gross margin		$ 3,063,000
Less selling and administrative costs
Variable	$ 550,000
Fixed	120,000	670,000
Operating income		$ 2,393,000

Required:

1. Using the full costing method, prepare the income statement for 2022.

2-a. Using variable costing, prepare an income statement for each period.

2-b. Prepare a reconciliation of the difference each year in the operating income resulting from the full- and variable-costing methods.

Prev

Question 4 of 6 Total4 of