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 20x7 and 2012 were based on the following estimates. 20x1 202 Direct labor hours Direct labor cost Fixed manufacturing overhead Variable manufacturing overhead 32,500 $325.000 $130,000 $162,500 4,000 $46 $176,000 $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 20xi and 20x2 comparative Income statement. San Mateo Optics, Inc. Comparative Income Statement For the Years 20x1 and 20x2 20x1 20x2 $1,140,000 $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 Overhead adjustment Cost of goods sold Gross profit Selling expenses Administrative expenses Operating income $ 16.000 720.000 5 736.000 25.000 $ 711,000 12.000 $ 723.000 $ 417.000 (150,000) (160,000) $ 107.000 $ 25,000 976.000 $1.001,000 14,000 $ 987.000 7,000 $ 994,000 $ 526,000 (190,000) (187,000) $ 149,000 San Mateo's actual manufacturing data for the two years are as foll ws: 201 20x2 Direct labor hours Direct labor cost Direct materials used Manufacturing overhead 30.000 S300.000 $140.000 S132,000 42.000 5435.000 S210,000 $175.000 The company's actual inventory balances were as follows: December 31. 20x1 December 31, 20x2 December 31, 20x0 $32.000 $36.000 $18.000 Direct materials Work in process: Direct labor hours Direct labor cost Direct materials used Manufacturing overhead 30.000 $300,000 S140,000 $132,000 42,000 $435.000 $210.000 $175.000 The company's actual Inventory balances were as follows: December 31, 20x0 December 31, 20x1 December 31, 20x2 $18,000 $32,000 $36.000 $44,000 1.800 $34.000 1.400 Direct materials Work in process: Costs Direct labor hours Finished goods: Costs Direct labor hours $60.000 2.500 $16.000 700 $25.000 1,080 $14.000 350 For both years, all administrative expenses were fixed, while a portion of the selling sper ses resulting from an 8 percent commission on net sales was variable. Sanllated resort any over-or underapplied overhead as an adjustment to the cost of goods sold. 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) Problem 18.30 San Mateo Optics, Inc. Variable-Costing Income Statement For the Year Ended December 31, 20XX Net Sales Variable costs: Finished goods inventory, January 1 Work-in-process inventory, January 1 Manufacturing costs Total available Finished goods inventory, December 31 Work-in-process inventory, December 31 Variable manufacturing costs Variable selling costs Total variable costs Contribution margin Fixed Costs: Factory overhead Selling expenses Administrative expenses Total fixed costs Operating income Show your work: Finished goods inventory, January 1 Work-in-process inventory, January 1 Manufacturing costs Total available Finished goods inventory, December 31 Work-in-process inventory, December 31 Variable manufacturing costs Variable selling costs Total variable costs Contribution margin Fixed Costs: Factory overhead Selling expenses Administrative expenses Total fixed costs Operating income Show your work: 6 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 Direct labor hours Direct labor cost Fixed manufacturing overhead Variable manufacturing overheid 20x1 32.500 5325,000 $130,000 5162,500 20x2 44,000 $462,000 $176,000 $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 Maten Onties. In San Mateo Optics, Inc. Comparative Income Statement For the Years 20x1 and 20x2 20x1 S1,140,000 20x2 $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 Overhead 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 5 723,000 $ 417,000 (150.000) (160,000) S 107.000 $ 25,000 976,000 $1.001,000 14,000 $ 987,000 7,000 $ 994,000 S 526,000 (190,000) (187.000) $ 149,000 San Mateo's actual manufacturing data for the two years are as follows: 20x1 Direct labor hours Direct labor cost Direct materials used Manufacturing over head 30.000 $300.000 S140,000 S132.000 20x2 42.000 $435.000 S210.000 $175.000 The company's actual inventory balances were as follows: December 31. 20x0 $32,000 December 31, 20x1 $36.000 December 31. 20x2 $18,000 Direct materials Work in process Direct labor hours Direct labor cost Direct materials used Manufacturing overhead 30,000 $300,000 $140,000 $132,000 42,000 $435,000 $210,000 $175,000 The company's actual inventory balances were as follows: December 31, 20x0 December 31. 20x1 December 31, 20x2 $32.000 S36,000 $18,000 Direct materials Work in process Costs Direct labor hours Finished goods Costs Direct labor hours S60,000 $44,000 1.800 $34.000 1,400 2.500 $16.000 700 S25.000 1,080 S14,000 550 For both years, all administrative expenses were fixed, while a portion of the selling expenses resulting from an 8 percent commission on net sales was variable. San Mateo reports any over- or underapplied overhead as an adjustment to the cost of goods sold. 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) 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 20x7 and 2012 were based on the following estimates. 20x1 202 Direct labor hours Direct labor cost Fixed manufacturing overhead Variable manufacturing overhead 32,500 $325.000 $130,000 $162,500 4,000 $46 $176,000 $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 20xi and 20x2 comparative Income statement. San Mateo Optics, Inc. Comparative Income Statement For the Years 20x1 and 20x2 20x1 20x2 $1,140,000 $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 Overhead adjustment Cost of goods sold Gross profit Selling expenses Administrative expenses Operating income $ 16.000 720.000 5 736.000 25.000 $ 711,000 12.000 $ 723.000 $ 417.000 (150,000) (160,000) $ 107.000 $ 25,000 976.000 $1.001,000 14,000 $ 987.000 7,000 $ 994,000 $ 526,000 (190,000) (187,000) $ 149,000 San Mateo's actual manufacturing data for the two years are as foll ws: 201 20x2 Direct labor hours Direct labor cost Direct materials used Manufacturing overhead 30.000 S300.000 $140.000 S132,000 42.000 5435.000 S210,000 $175.000 The company's actual inventory balances were as follows: December 31. 20x1 December 31, 20x2 December 31, 20x0 $32.000 $36.000 $18.000 Direct materials Work in process: Direct labor hours Direct labor cost Direct materials used Manufacturing overhead 30.000 $300,000 S140,000 $132,000 42,000 $435.000 $210.000 $175.000 The company's actual Inventory balances were as follows: December 31, 20x0 December 31, 20x1 December 31, 20x2 $18,000 $32,000 $36.000 $44,000 1.800 $34.000 1.400 Direct materials Work in process: Costs Direct labor hours Finished goods: Costs Direct labor hours $60.000 2.500 $16.000 700 $25.000 1,080 $14.000 350 For both years, all administrative expenses were fixed, while a portion of the selling sper ses resulting from an 8 percent commission on net sales was variable. Sanllated resort any over-or underapplied overhead as an adjustment to the cost of goods sold. 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) Problem 18.30 San Mateo Optics, Inc. Variable-Costing Income Statement For the Year Ended December 31, 20XX Net Sales Variable costs: Finished goods inventory, January 1 Work-in-process inventory, January 1 Manufacturing costs Total available Finished goods inventory, December 31 Work-in-process inventory, December 31 Variable manufacturing costs Variable selling costs Total variable costs Contribution margin Fixed Costs: Factory overhead Selling expenses Administrative expenses Total fixed costs Operating income Show your work: Finished goods inventory, January 1 Work-in-process inventory, January 1 Manufacturing costs Total available Finished goods inventory, December 31 Work-in-process inventory, December 31 Variable manufacturing costs Variable selling costs Total variable costs Contribution margin Fixed Costs: Factory overhead Selling expenses Administrative expenses Total fixed costs Operating income Show your work: 6 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 Direct labor hours Direct labor cost Fixed manufacturing overhead Variable manufacturing overheid 20x1 32.500 5325,000 $130,000 5162,500 20x2 44,000 $462,000 $176,000 $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 Maten Onties. In San Mateo Optics, Inc. Comparative Income Statement For the Years 20x1 and 20x2 20x1 S1,140,000 20x2 $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 Overhead 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 5 723,000 $ 417,000 (150.000) (160,000) S 107.000 $ 25,000 976,000 $1.001,000 14,000 $ 987,000 7,000 $ 994,000 S 526,000 (190,000) (187.000) $ 149,000 San Mateo's actual manufacturing data for the two years are as follows: 20x1 Direct labor hours Direct labor cost Direct materials used Manufacturing over head 30.000 $300.000 S140,000 S132.000 20x2 42.000 $435.000 S210.000 $175.000 The company's actual inventory balances were as follows: December 31. 20x0 $32,000 December 31, 20x1 $36.000 December 31. 20x2 $18,000 Direct materials Work in process Direct labor hours Direct labor cost Direct materials used Manufacturing overhead 30,000 $300,000 $140,000 $132,000 42,000 $435,000 $210,000 $175,000 The company's actual inventory balances were as follows: December 31, 20x0 December 31. 20x1 December 31, 20x2 $32.000 S36,000 $18,000 Direct materials Work in process Costs Direct labor hours Finished goods Costs Direct labor hours S60,000 $44,000 1.800 $34.000 1,400 2.500 $16.000 700 S25.000 1,080 S14,000 550 For both years, all administrative expenses were fixed, while a portion of the selling expenses resulting from an 8 percent commission on net sales was variable. San Mateo reports any over- or underapplied overhead as an adjustment to the cost of goods sold. 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)