Question

The Daniels Tool & Die Corporation has been in existence for a little over three years. The company’s sales have been increasing each year as it builds a reputation. The company manufactures dies to its customers’ specifications and therefore uses a job-order cost system. Factory overhead is applied to the jobs based on direct labour hours—the absorption-costing (full) method. Overapplied or underapplied overhead is treated as an adjustment to Cost of Goods Sold. The company’s income statements and other data for the last two years are as follows:

DANIELS TOOL & DIE CORPORATION 2015–2016 Comparative Income Statements
			2015		2016
Sales			$833,900		$1,015,100
Cost of goods sold
	Finished goods, January 1		24,000		17,800
	Cost of goods manufactured		544,600		654,400
	Total available		568,600		672,200
	Finished goods, December 31		17,800		13,300
	Cost of goods sold before overhead adjustment		550,800		658,900
	Underapplied factory overhead		35,800		14,100
Cost of goods sold			586,600		673,000
Gross profit			247,300		342,100
Selling expenses			81,900		94,500
Administrative expenses			69,000		74,400
	Total operating expenses		150,900		168,900
Operating income			$96,400		$173,200

Daniels Tool & Die Corporation Inventory Balances
		January 1, 2015			December 31, 2015			December 31, 2016
Raw material		$21,700			$29,900			$10,400
Work in process		$40,500			$47,700			$63,400
Direct labour hours (used in WIP)		1,350			1,630			2,280
Finished goods		$24,000			$17,800			$13,300
Direct labour hours (used in FG)		1,470			1,010			840

Daniels used the same predetermined overhead rate in applying overhead to its production orders in both 2015 and 2016. The rate was based on the following estimates:

Fixed factory overhead		$24,790
Variable factory overhead		$153,698
Direct labour hours (used in WIP)		24,790
Direct labour costs (used in FG)		$148,740

In 2015 and 2016, the actual direct labour hours used were 20,200 and 23,800, respectively. Raw materials put into production were $291,500 in 2015 and $370,600 in 2016. The actual fixed overhead was $42,300 for 2015 and $23,240 for 2016, and the planned direct labour rate was the direct labour achieved.

For both years, all of the administrative costs were fixed. The variable portion of the selling expenses results from a 5% commission that is paid as a percentage of the sales revenue.

1. For the year ended December 31, 2016, prepare a revised income statement for Daniels Tool & Die Corporation using the variable-costing method. (Round answers to 0 decimal places, e.g. 5,275.)

Sales
Less: Variable Costs
Variable Cost of Goods Sold
Variable Selling and Administrative Expenses
Total Variable Costs
Contribution Margin
Less: Fixed Costs
Fixed Manufacturing Overhead
Fixed Selling and Administrative Expenses
Total Fixed Costs
Operating Income

Answer 1

Solution:

Particulars	Amount ($)	Amount ($)
Sales (A)		$1,015,100
Variable cost of goods sold
Raw material	$390,100
Labor cost	$143,820
Prime cost		$533,920
Variable factory overheads		$115,840
Sales commission		$50,755
Total Variable cost (B)		$700,515
Fixed cost
Fixed factory overheads		$23,240
Administration expenses		$74,400
Selling expenses other than sales commission($94,500 - $50,755)		$43,745
Total fixed cost (C)		$141,385
Operating Income (A-B-C)		$173,200

Working Note:
1.)Direct labor hour rate = Estimated direct labor cost / Estimated labor hours
= $148,740/$24,790
=$6
Direct labor hours (used in WIP) = $24,790

2.)Computation of Direct labor cost
Opening stock = $1010
Production = $23,800
Less:
Finished goods Labor hours = $840
Labor hours used for production cost of goods sold = $23,970
= $6
Labor cost = $143,820

3.)Raw material cost  
Opening Stock = $29,900
Raw material purchased = $370,600
Closing Stock = $10,400
= $390,100

4.)Computation of factory overheads
Cost of goods sold before overhead adjustment = $658,900
Under applied factory overhead = $14,100
Cost of goods sold = $673,000
less:
Raw material cost = $390,100
Labor cost = $143,820
Factory overheads = $139,080
less:
Actual fixed factory overheads = $23,240
Variable factory overhead = $115,840