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 absorptionor full-costing method. San Mateo€™s predetermined overhead rates for 2015 and 2016 were based on the following estimates.

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 2015 and 2016 comparative income statement.

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

The company€™s actual inventory balances were as follows:

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 over or underapplied overhead as an adjustment to the cost of goods sold.
Required:
1. For the year ended December 31, 2016, 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.
2. Describe two advantages of using variable costing rather than absorption costing.

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2015 2016 Direct labor hours 32,500 44,000 S325,000 S462,000 $130,000 176,000 Variable manufacturing overhead $162,500 $198,000 Direct labor cost Fixed manufacturing overhead San Mateo Optics, Inc. Comparative Income Statement For the Years 2015 and 2016 2015 2016 Net sales Cost of goods sold: 1,140,000 $1,520,000 Finished goods at January 1 Cost of goods manufactured 16,000 720,000 736,000 25,000 $ 25,000 976,000 $1,001,000 14,000 Total available Less: Finished goods at December 31 2015 2016 42,000 $300,000 S435,000 $140,000 S210,000 Manufacturing overhead $132,000 $175,000 Direct labor hours 30,000 Direct labor cost Direct materials used December 31 December 31 December 31, , 2014 $32,000 $44,000 2015 $36,000 $34,000 2016 $18,000 S60,000 Direct materials Work in process: Costs Direct labor hours 1,800 1,400 2,500 Finished goods Costs Direct labor hours $16,000 $25,000 $14,000 700 1,080 550