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. 20x120x2 Direct labor hours 32,500 44,000 Direct labor cost Fixed manufacturing overhead $325,000 $462,000 $130,000 $176,000 Variable manufacturing overhead $162,500 $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 Mateo Optics, Inc. Comparative Income Statement For the Years 20x1 and 20x2 20x1 20x2 $1,520,000 Net sales $1,140,000 Cost of goods sold: Finished goods at January 1 $ 16,000 720,000 $25,000 976,000 Cost of goods manufactured Total available Less: Finished goods at December 31 Unadjusted cost of goods sold $ 736,000 25,000 $711,000 $1,001,000 14,000 $987,000 Unadjusted cost of goods sold Overhead adjustment Cost of goods sold Gross profit $ 711,000 12,000 $723,000 $ 417,000 (150,000) (160,000) $987,000 7,000 $994,000 $ 526,000 (190,000) (187,000) $149,000 Selling expenses Administrative expenses Operating income $ 107,000 San Mateo's actual manufacturing data for the two years are as follows: 20x120x2 Direct labor hours 30,000 42,000 Direct labor cost $300,000 $135,000 Direct materials used $140,000 $210,000 Manufacturing overhead $132,000 $175,000 The company's actual inventory balances were as follows: December 31, December 31, December 31, 20x1 20x2 $32,000 $36,000 $18,000 20x0 Direct materials Work in process: Costs $44,000 1,800 534,000 1,400 $60,000 2,500 Direct labor hours Finished goods: Costs $14,000 $16,000 700 $25,000 1,080 Direct labor hours 550 Direct labor hours 700 1,080 550 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 overor 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. Enter all answers as positive amounts. San Mateo Optics, Inc. Variable-Costing Income Statement For the Year Ended December 31, 20x2 Variable costs: Accounting numeric field Total available Total variable costs Fixed costs: Variable-Costing Income Statement For the Year Ended December 31, 20x2 Variable costs: Total available Total variable costs ID Fixed costs: Total fixed costs Finished goods inventory, January 1
