P8-35A 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 hours-the absorption-costing (full) method. Overapplied or underapplied overhead is treated as an adjustment to cost of goods sold The company's income statements and other data for the last two years are as follows: DANIELS TOOL & DIE CORPORATION 2015-2016 Comparative Income Statements 2015 $840,000 2016 Sales Cost of goods sold $1,015,000 Finished goods, January 1 Cost of goods manufactured Total available Finished goods, December 31 Cost of goods sold before overhead adjustment Underapplied factory overhead 25,000 548,000 573,000 18,000 555,000 36,000 591,000 249,000 82,000 70,000 152,000 $97,000 18,000 657,600 675,600 14,000 661,600 14,400 676,000 339,000 95,000 75,000 170,000 $169,000 Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Operating income Daniels Tool & Die Corporation Inventory Balances December 31, 2016 anuary 1,2015 $22,000 $40,000 December 31, 2017 Raw material Work in process Direct labour hours $30,000 $48,000 1,600 $10,000 $64,000 2,100 1,335 (used in WIP) Finished goods $25,000 1,450 $18,000 1,050 $14,000 820 Direct labour hours (used in FG) Daniels used the same predetermined overhead rate in applying overhead to its production orders in both 2015 and 2016. 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 2015 and 2016, the actual direct labour hours used were 20,000 and 23,000, respectively. Raw materials put into production were $292,000 in 2015 and $370,000 in 2016. The actual fixed overhead was $42,300 for 2015 and $37,400 for 2016, 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, 2016, prepare a revised income statement for Daniels Tool &Die Corporation using the variable-costing method (b) Reconcile the difference in operating income between Daniels Tool &Die Corporation's 2016 absorption-costing income statement and the revised 2016 income statement prepared under variable costing. (c) Describe both the advantages and disadvantages of using variable costing. (adapted from CMA Canada, now CPA Canada)