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 $63 per unit and had sales of 24,400 units in the current year, 2018. STI has no inventory on hand at the beginning of 2018 and is projecting sales of 27,200 units in 2019. STI is planning the same production level for 2019 as in 2018, 25,800 units. The variable manufacturing costs for STI are $24, and the variable selling costs are only $0.60 per unit. The fixed manufacturing costs are $180,600 per year, and the fixed selling costs are $580 per year.

Required:

1. Prepare an income statement for each year using full costing. (Round your final answers to nearest whole dollar amount.)

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.

Please follow order bellow for your answers.

1. 2018 2019

sales
Less COGS
Beginning inventory
Available for sale
less: ending inventory
COGS
Gross margin
less selling and admin costs
fixed
variable

2. 2018 2019

Sales
Less: Cost of goods sold
Cost of goods produced
Beginning inventory
Available for sale
Cost of goods sold
Contribution margin
less: Selling and administrative costs
Operating income

3.

	2018	2019
Change in inventory in units
Multiply times fixed overhead rate
Difference in operating income

Answer 1

1) Income as per Full costing method

Particulars		2018		2019
Sales (24400*63, 27200*63)	(24400*63)	$       15,37,200	(27200*63)	$       17,13,600
Less: Cost of goods sold
Begining inventory		-		$             43,400
Cost of goods produced		$          7,99,800		$          7,99,800
Available for sale		$          7,99,800		$          8,43,200
Less: Ending inventory		$             43,400		0
Cost of goods sold		$          7,56,400		$          8,43,200
Gross margin		$          7,80,800		$          8,70,400
Less: Selling and administrative costs
Fixed		$                   580		$                   580
Variable		$             14,640		$             16,320
Operating income		$          7,65,580		$          8,53,500

Working;

Cost of goods produced	2018	2019
Units produced	25,800	25,800
Variable manufacturing cost @24 per unit	$       6,19,200	$       6,19,200
Fixed manufacturing costs	$       1,80,600	$       1,80,600
Total cost of production	$       7,99,800	$       7,99,800
Cost of unit produced (799800/25800)	$                   31	$                   31
Units sold	24,400	27,200
Closing inventory	1,400
Cost of closing inventory (1400*31)	$           43,400
Cost of goods sold	$       7,56,400	$       8,43,200
Selling and administrative costs	2018	2019
Units sold	24400	27200
Variable costs @0.6 per unit	$           14,640	$           16,320
Fixed costs	$                 580	$                 580
Total selling and administrative costs	$           15,220	$           16,900

2) Income using Variable costing method:

Particulars		2018		2019
Sales	(24400*63)	$       15,37,200	(27200*63)	$       17,13,600
Less: Cost of goods sold
Cost of goods produced	(25400*24)	$          6,19,200	(25400*24)	$          6,19,200
Begining inventory		-	(1400*24)	$             33,600
Available for sale		$          6,19,200		$          6,52,800
Less: Closing inventory	(1400*24)	$             33,600		-
Cost of goods sold		$          5,85,600		$          6,52,800
Contribution		$          9,51,600		$       10,60,800
Less:Variable selling and administrative costs	(24400*$0.6)	$             14,640	(27200*0.6)	$             16,320
Contribution margin		$          9,36,960		$       10,44,480
Fixed costs
Less: Fixed manufacturing costs		$          1,80,600		$          1,80,600
Less: Selling and administrative costs		$                   580		$                   580
Add: Fixed manufacturing costs		$          1,81,180		$          1,81,180
Operating income		$          7,55,780		$          8,63,300

3) Reconciliation:

Particulars	2018	2019
Income as per full costing method	$       7,65,580	$       8,53,500
Less:
Change in inventory units	-1,400	1,400
Fixed overheads absorption rate (180600/25800)	7	7
Difference in operating income	-9,800	9,800
Income as per variable costing method	$       7,55,780	$       8,63,300