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 $59 per unit and had sales of 24,200 units in the current year, 2018. STI has no inventory on hand at the beginning of 2018 and is projecting sales of 26,600 units in 2019. STI is planning the same production level for 2019 as in 2018, 25,400 units. The variable manufacturing costs for STI are $20, and the variable selling costs are only $0.90 per unit. The fixed manufacturing costs are $203,200 per year, and the fixed selling costs are $540 per year.

Required:

1. Prepare an income statement for each year using full costing.

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 method.

Answer 1

ans 1
Income statement
Full costing
	2018	2019
No. of units sold N	24200	26600
Sales (N*59)	1427800	1569400
Less: Cost of good sold N*28	677600	744800
Gross profit	750200	824600
Less:
Fixed selling expenses	540	540
Variable selling expenses (.9*N)	21780	23940
Net Operating income	728420	800660
Fixed manufacturing overhead rate per unit
203200/25400	8.00
ans 2
Income statement
Variable costing
No. of units sold N	24200	26600
Sales (N*59)	1427800	1569400
Less: VariableCost of good sold (20*N)	484000	532000
Variable selling expenses (.9*N)	21780	23940
Contribution margin	922020	1013460
Less:
Fixed selling expenses	540	540
Fixed manufacturing overhead	203200	203740
Net Operating income	718820	809720
ans 3
Income under variable costing	718820	809720
Add: Deferred Fixed Manufacturing overhead in ending inventory (1200*8)	9600
Less: Deferred Fixed Manufacturing overhead in Beginning inventory (1200*8)		-9600
Income under full costing	728420	800120
If any doubt please comment