Question

Security Technology Inc. (STI) is a manufacturer of an electronic control system used in the manufacture of certain special-duty auto transmissions used primarily for police and military applications. The part sells for $45 per unit and had sales of 24,800 units in the current year, 2018. STI has no inventory on hand at the beginning of 2018 and is projecting sales of 28,400 units in 2019. STI is planning the same production level for 2019 as in 2018, 26,600 units. The variable manufacturing costs for STI are $16, and the variable selling costs are only $0.70 per unit. The fixed manufacturing costs are $133,000 per year, and the fixed selling costs are $660 per year. Required: 1. Prepare an income statement for each year using full costing. 2. Prepare an income statement for each year using variable costing. 3. Prepare a reconciliation of the difference each year in the operating income resulting from the full and variable costing methods.

Answer 1

Answer:

1. Prepare an income statement for each year using full costing.

                                                                           2018                       2019

Sales                                                               1,116,000               1,278,000

Less Cost of Sales                                         (520,800)              (596,400)

Opening Stock                                                      0                        37,800

Add Cost of Goods Manufactured                 558,600                558,600

Less Closing Stock                                          (37,800)                      0

Gross Profit                                                      595,200                681,600

Less Expenses

variable selling costs ($0.70)                           (17,360)                 (19,880)

fixed selling costs are                                        ($660)                  ($660)

Net Income                                                       577,180                 661,060

2. Prepare an income statement for each year using variable costing.

                                                                           2018                       2019

Sales                                                               1,116,000               1,278,000

Less Cost of Sales                                         (396,800)              (454,400)

Opening Stock                                                      0                        28,800

Add Cost of Goods Manufactured                 425,600                425,600

Less Closing Stock                                          (28,800)                      0

Gross Profit                                                      719,200                823,600

Less Expenses

fixed manufacturing costs                              (133,000)             (133,000)

variable selling costs ($0.70)                           (17,360)                 (19,880)

fixed selling costs are                                        ($660)                  ($660)

Net Income                                                       568,180                 670,060

3. Prepare a reconciliation of the difference each year in the operating income resulting from the full and variable costing methods.

                                                                           2018                      2019

Full Costing Operating Income                      577,180                 661,060

Add Fixed Costs in Opening Inventory              0                          9,000

Less Fixed Costs in Closing Inventory           (9,000)                       0

Variable Costing Operating Income             568,180                 670,060

Explanation:

Full Costing Product Cost = Variable Overheads + Fixed Overheads

                                             = $16 + ($133,000/26,600 units)

                                             = $21

1. Prepare an income statement for each year using full costing.

                                                                           2018                       2019

Sales                                                               1,116,000               1,278,000

Less Cost of Sales                                         (520,800)              (596,400)

Opening Stock                                                      0                        37,800

Add Cost of Goods Manufactured                 558,600                558,600

Less Closing Stock                                          (37,800)                      0

Gross Profit                                                      595,200                681,600

Less Expenses

variable selling costs ($0.70)                           (17,360)                 (19,880)

fixed selling costs are                                        ($660)                  ($660)

Net Income                                                       577,180                 661,060

Variable Costing Product Cost = Variable Overheads

                                                     = $16

2. Prepare an income statement for each year using variable costing.

                                                                           2018                       2019

Sales                                                               1,116,000               1,278,000

Less Cost of Sales                                         (396,800)              (454,400)

Opening Stock                                                      0                        28,800

Add Cost of Goods Manufactured                 425,600                425,600

Less Closing Stock                                          (28,800)                      0

Gross Profit                                                      719,200                823,600

Less Expenses

fixed manufacturing costs                              (133,000)             (133,000)

variable selling costs ($0.70)                           (17,360)                 (19,880)

fixed selling costs are                                        ($660)                  ($660)

Net Income                                                       568,180                 670,060

3. Prepare a reconciliation of the difference each year in the operating income resulting from the full and variable costing methods.

Reconciliation of Full Costing Operating Income to Variable Costing Operating Income.

Hint : Difference lies in the Fixed Cost Component deferred in Closing Inventory under the Absorption Cost

                                                                           2018                      2019

Full Costing Operating Income                      577,180                 661,060

Add Fixed Costs in Opening Inventory              0                          9,000

Less Fixed Costs in Closing Inventory           (9,000)                       0

Variable Costing Operating Income             568,180                 670,060