The Daniels Tool & Die Corporation has been in existence for a little over 3 years, and sales have been increasing each year. A job-order cost system is used. Factory overhead is applied to jobs based on direct labor hours, utilizing the full absorption costing method. Overapplied or underapplied overhead is treated as an adjustment to cost of goods sold. The companys income statements for the last 2 years are presented below:

Daniels Tool & Die Corporation

Year 3-Year 4 Comparative Income Statements

Year 3 Year 4

Sales $840,000 $1,015,000

Cost of goods sold:

Finished goods, 1/1 25,000 18,000

Cost of goods manufactured 548,000 657,600

Total available 573,000 675,600

Finished goods, 12/31 18,000 14,000

Cost of goods sold before overhead adjustment 555,000 661,600

Underapplied factory overhead 36,000 14,400

Cost of goods sold 591,000 676,000

Gross profit 249,000 339,000

Selling expenses 82,000 95,000

Administrative expenses 70,000 75,000

Total operating expenses 152,000 170,000

Operating income 97,000 169,000

Daniels Tool & Die Corporation

Inventory Balances

1/1/Year 3 12/31/Year 3 12/31/Year 4

Raw material 22,000 30,000 10,000

Work-in-process costs 40,000 48,000 64,000

Direct labor hours 1,335 1,600 2,100

Finished goods cost 25,000 18,000 14,000

Direct labor hours 1,450 1,050 820

Daniels used the same predetermined overhead rate in applying overhead to production orders in both Year 3 and Year 4. The rate was based on the following estimates:

Fixed factory overhead $25,000

Variable factory overhead 155,000

Direct labor hours 25,000

Direct labor costs 150,000

In Year 3 and Year 4, actual direct labor hours expended were 20,000 and 23,000, respectively. Raw materials put into production were $292,000 in Year 3 and $370,000 in Year 4. Actual fixed overhead was $37,400 for Year 4 and $42,300 for Year 3, and the planned direct labor rate was the direct labor rate achieved.

For both years, all the reported administrative costs were fixed, while the variable portion of the reporting selling expenses result from a commission of 5% of sales revenue.

Questions

For the year ended December 31, Year 4, prepare a revised income statement utilizing the variable (direct) costing method. Be sure to include contribution margin.

Prepare a numerical reconciliation of the difference in operating income between Daniels Year 4 income statement prepared on the basis of absorption costing and the revised Year 4 income statement prepared on the basis of variable costing.