San Mateo Optics Inc specializes in manufacturing lenses for large
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.
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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