P8.35A (LO 1, 2, 3) The Daniels Tool & Die Corporation has been in existence for a little over three years. The company's sales have been increasing each year as it builds a reputation. The company manufactures dies to its customers' specifications and therefore uses a job-order cost system. Factory overhead is applied to the jobs based on direct labour hoursthe absorption-costing (full) method. Over-applied or under-applied overhead is treated as an adjustment to cost of goods sold. The company's income statements and other data for the past two years are as follows: DANIELS TOOL & DIE CORPORATION 2019-2020 Comparative Income Statements 2019 2020 $840,000 $1,015,000 25,000 18,000 Sales Cost of goods sold Finished goods, January 1 Cost of goods manufactured Total available Finished goods, December 31 Cost of goods sold before overhead adjustment 657,600 675,600 548,000 573,000 18,000 555,000 14,000 661,600 18,000 14,000 661,600 555,000 36,000 14,400 Finished goods, December 31 Cost of goods sold before overhead adjustment Under-applied factory overhead Cost of goods sold Gross profit Selling expenses 591,000 249,000 676,000 339,000 95,000 75,000 82,000 Administrative expenses 70,000 170,000 Total operating expenses Operating income 152,000 $ 97,000 $ 169,000 December 31, 2020 Raw material Daniels Tool & Die Corporation Inventory Balances January 1, 2018 December 31, 2019 $22,000 $30,000 $40,000 $48,000 1,335 1,600 Work in process Direct labour hours (used in WIP) $10,000 $64,000 2,100 1,600 Direct labour hours (used in WIP) Finished goods Direct labour hours (used in FG) 1,335 $25,000 1,450 $18,000 1,050 2,100 $14,000 820 Daniels used the same predetermined overhead rate in applying overhead to its production orders in both 2019 and 2020. The rate was based on the following estimates: Fixed factory overhead Variable factory overhead Direct labour hours Direct labour costs $ 25,000 $155,000 25,000 $150,000 In 2019 and 2020, the actual direct labour hours used were 20,000 and 23,000, respectively. Raw materials put into production were $292,000 in 2019 and $370,000 in 2020. The actual fixed overhead was $42,300 for 2019 and $37,400 for 2020, and the planned direct labour rate was the direct labour achieved. For both years, all of the administrative costs were fixed. The variable portion of the selling expenses results from a 5% commission that is paid as a percentage of the sales revenue. Instructions In 2019 and 2020, the actual direct labour hours used were 20,000 and 23,000, respectively. Raw materials put into production were $292,000 in 2019 and $370,000 in 2020. The actual fixed overhead was $42,300 for 2019 and $37,400 for 2020, and the planned direct labour rate was the direct labour achieved. For both years, all of the administrative costs were fixed. The variable portion of the selling expenses results from a 5% commission that is paid as a percentage of the sales revenue. Instructions a. For the year ended December 31, 2020, prepare a revised income statement for Daniels Tool & Die Corporation using the variable-costing method. Operating income $168,730 b. Reconcile the difference in operating income between Daniels Tool & Die Corporation's 2020 absorption-costing income statement and the revised 2020 income statement prepared under variable costing. c. Describe both the advantages and disadvantages of using variable costing
