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	Yeat 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

A) 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.

B) 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.