Portland Optics, Inc., specializes in manufacturing lenses for large telescope cameras used in space exploration. Since the
Question:
Portland's predetermined overhead rates for 2011 and 2012 were based on the following estimates:
__________________________ 2011 ____________ 2012
Direct labour hours .............. 32,500 ............... 44,000
Direct labour cost .............. $325,000 ............ $462,000
Fixed factory overhead ...... $130,000 ............. $176,000
Variable factory overhead ... $162,500 ............. $198,000
Marie-Michelle David, Portland's controller, would like to use variable costing for internal reporting since she 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 Portland's management team, Marie-Michelle plans to convert the company's income statement from absorption costing to variable costing. She has gathered the following information, along with a copy of Portland's comparative income statement for the years 2011 and 2012.
PORTLAND OPTICS, INC.
Comparative Income Statement
Years 2011-2012
Portland's actual manufacturing data for the two years are as follows:
__________________________________ 2011 __________ 2012
Direct labour hours ........................ 30,000 ............... 42,000
Direct labour cost ........................ $300,000 ............ $435,000
Raw materials used ....................... $140,000 ........... $210,000
Fixed factory overhead .................. $132,000 ........... $175,000
The company's actual inventory balances were as follows:
For both years, all administrative costs were fixed. A portion of the selling expenses was variable as it resulted from an 8% commission paid on net sales. Portland reports any over- or under applied overhead as an adjustment to Cost of Goods Sold.
Instructions
(a) For the year ended December 31, 2012, prepare the revised income statement for Portland Optics, Inc., using the variable-costing method. Be sure to include the contribution margin on the revised income statement.
(b) Describe two advantages of using variable costing rather than absorption costing.
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
Step by Step Answer:
Managerial Accounting Tools for Business Decision Making
ISBN: 978-1118033890
3rd Canadian edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso, Ibrahim M. Aly