Absorption- and Variable-Costing Income Statements 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. 20x1 20x2 Direct labor hours 32,500 44,000 Direct labor cost $325,000 $462,000 Fixed manufacturing overhead $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 Net sales $1,140,000 $1,520,000 Cost of goods sold: Finished goods at January 1 $ 16,000 $ 25,000 Cost of goods manufactured 720,000 976,000 Total available $ 736,000 $1,001,000 Less: Finished goods at December 31 25,000 14,000 Unadjusted cost of goods sold $ 711,000 $ 987,000 Overhead adjustment 12,000 7,000 Cost of goods sold $ 723,000 $ 994,000 Gross profit $ 417,000 $ 526,000 Selling expenses (150,000) (190,000) Administrative expenses (160,000) (187,000) Operating income $ 107,000 $ 149,000 San Mateo’s actual manufacturing data for the two years are as follows: 20x1 20x2 Direct labor hours 30,000 42,000 Direct labor cost $300,000 $435,000 Direct materials used $140,000 $210,000 Manufacturing overhead $132,000 $175,000 The company’s actual inventory balances were as follows: December 31, 20x0 December 31, 20x1 December 31, 20x2 Direct materials $32,000 $36,000 $18,000 Work in process: Costs $44,000 $34,000 $60,000 Direct labor hours 1,800 1,400 2,500 Finished goods: Costs $16,000 $25,000 $14,000 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 $fill in the blank 4adf9802303a04b_2 Variable costs: $fill in the blank 4adf9802303a04b_4 fill in the blank 4adf9802303a04b_6 fill in the blank 4adf9802303a04b_8 Total available $fill in the blank 4adf9802303a04b_9 fill in the blank 4adf9802303a04b_11 fill in the blank 4adf9802303a04b_13 $fill in the blank 4adf9802303a04b_15 fill in the blank 4adf9802303a04b_17 Total variable costs fill in the blank 4adf9802303a04b_18 $fill in the blank 4adf9802303a04b_20 Fixed costs: $fill in the blank 4adf9802303a04b_22 fill in the blank 4adf9802303a04b_24 fill in the blank 4adf9802303a04b_26 Total fixed costs fill in the blank 4adf9802303a04b_27 $fill in the blank 4adf9802303a04b_29 Finished goods inventory, January 1: $fill in the blank 4adf9802303a04b_31 fill in the blank 4adf9802303a04b_33 $fill in the blank 4adf9802303a04b_34 2. Select an advantage of using variable costing rather than absorption costing. (CMA adapted)

Absorption- and Variable-Costing Income Statements 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. 20x1 20x2 Direct labor hours 32,500 44,000 Direct labor cost $325,000 $462,000 Fixed manufacturing overhead $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 Net sales $1,140,000 $1,520,000 Cost of goods sold: Finished goods at January 1 $ 16,000 $ 25,000 Cost of goods manufactured 720,000 976,000 Total available $ 736,000 $1,001,000 Less: Finished goods at December 31 25,000 14,000 Unadjusted cost of goods sold $ 711,000 $ 987,000 Overhead adjustment 12,000 7,000 Cost of goods sold $ 723,000 $ 994,000 Gross profit $ 417,000 $ 526,000 Selling expenses (150,000) (190,000) Administrative expenses (160,000) (187,000) Operating income $ 107,000 $ 149,000 San Mateo’s actual manufacturing data for the two years are as follows: 20x1 20x2 Direct labor hours 30,000 42,000 Direct labor cost $300,000 $435,000 Direct materials used $140,000 $210,000 Manufacturing overhead $132,000 $175,000 The company’s actual inventory balances were as follows: December 31, 20x0 December 31, 20x1 December 31, 20x2 Direct materials $32,000 $36,000 $18,000 Work in process: Costs $44,000 $34,000 $60,000 Direct labor hours 1,800 1,400 2,500 Finished goods: Costs $16,000 $25,000 $14,000 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 $fill in the blank 4adf9802303a04b_2 Variable costs: $fill in the blank 4adf9802303a04b_4 fill in the blank 4adf9802303a04b_6 fill in the blank 4adf9802303a04b_8 Total available $fill in the blank 4adf9802303a04b_9 fill in the blank 4adf9802303a04b_11 fill in the blank 4adf9802303a04b_13 $fill in the blank 4adf9802303a04b_15 fill in the blank 4adf9802303a04b_17 Total variable costs fill in the blank 4adf9802303a04b_18 $fill in the blank 4adf9802303a04b_20 Fixed costs: $fill in the blank 4adf9802303a04b_22 fill in the blank 4adf9802303a04b_24 fill in the blank 4adf9802303a04b_26 Total fixed costs fill in the blank 4adf9802303a04b_27 $fill in the blank 4adf9802303a04b_29 Finished goods inventory, January 1: $fill in the blank 4adf9802303a04b_31 fill in the blank 4adf9802303a04b_33 $fill in the blank 4adf9802303a04b_34 2. Select an advantage of using variable costing rather than absorption costing. (CMA adapted)

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Absorption- and Variable-Costing Income Statements

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.

	20x1	20x2
Direct labor hours	32,500	44,000
Direct labor cost	$325,000	$462,000
Fixed manufacturing overhead	$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
Net sales	$1,140,000	$1,520,000
Cost of goods sold:
Finished goods at January 1	$ 16,000	$ 25,000
Cost of goods manufactured	720,000	976,000
Total available	$ 736,000	$1,001,000
Less: Finished goods at December 31	25,000	14,000
Unadjusted cost of goods sold	$ 711,000	$ 987,000
Overhead adjustment	12,000	7,000
Cost of goods sold	$ 723,000	$ 994,000
Gross profit	$ 417,000	$ 526,000
Selling expenses	(150,000)	(190,000)
Administrative expenses	(160,000)	(187,000)
Operating income	$ 107,000	$ 149,000

San Mateo’s actual manufacturing data for the two years are as follows:

	20x1	20x2
Direct labor hours	30,000	42,000
Direct labor cost	$300,000	$435,000
Direct materials used	$140,000	$210,000
Manufacturing overhead	$132,000	$175,000

The company’s actual inventory balances were as follows:

	December 31, 20x0	December 31, 20x1	December 31, 20x2
Direct materials	$32,000	$36,000	$18,000
Work in process:
Costs	$44,000	$34,000	$60,000
Direct labor hours	1,800	1,400	2,500
Finished goods:
Costs	$16,000	$25,000	$14,000
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
		$fill in the blank 4adf9802303a04b_2
Variable costs:
	$fill in the blank 4adf9802303a04b_4
	fill in the blank 4adf9802303a04b_6
	fill in the blank 4adf9802303a04b_8
Total available	$fill in the blank 4adf9802303a04b_9
	fill in the blank 4adf9802303a04b_11
	fill in the blank 4adf9802303a04b_13
	$fill in the blank 4adf9802303a04b_15
	fill in the blank 4adf9802303a04b_17
Total variable costs		fill in the blank 4adf9802303a04b_18
		$fill in the blank 4adf9802303a04b_20
Fixed costs:
	$fill in the blank 4adf9802303a04b_22
	fill in the blank 4adf9802303a04b_24
	fill in the blank 4adf9802303a04b_26
Total fixed costs		fill in the blank 4adf9802303a04b_27
		$fill in the blank 4adf9802303a04b_29
Finished goods inventory, January 1:
	$fill in the blank 4adf9802303a04b_31
	fill in the blank 4adf9802303a04b_33
	$fill in the blank 4adf9802303a04b_34

2. Select an advantage of using variable costing rather than absorption costing. (CMA adapted)

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