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 $65 per unit and had sales of 24,500 units in the current year, 2018. STI has no inventory on hand at the beginning of 2018 and is projecting sales of 27,500 units in 2019. STI is planning the same production level for 2019 as in 2018, 26,000 units. The variable manufacturing costs for STI are $16, and the variable selling costs are only $0.80 per unit. The fixed manufacturing costs are $234,000 per year, and the fixed selling costs are $600 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 methods. Complete this question by entering your answers in the tabs below. Required 3 Required 1 Required 2 Prepare an income statement for each year using full costing. (Round your final answers to nearest whole dollar amount.) SECURITY TECHNOLOGY INC. Full Costing Income Statement 2018 2019 Sales 24,500 27,500 Less: Cost of goods sold Variable Fixed manufacturing costs Available for sale Cost of goods sold Gross margin Less: Selling and administrative costs Operating income Required 1 Required 2 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 $65 per unit and had sales of 24,500 units in the current year, 2018. STI has no inventory on hand at the beginning of 2018 and is projecting sales of 27,500 units in 2019. STI is planning the same production level for 2019 as in 2018, 26,000 units. The variable manufacturing costs for STI are $16, and the variable selling costs are only $0.80 per unit. The fixed manufacturing costs are $234,000 per year, and the fixed selling costs are $600 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 methods. Complete this question by entering your answers in the tabs below Required 1 Required 2 Required 3 Prepare an income statement for each year using variable costing. (Round your final answers to nearest whole dollar amount.) SECURITY TECHNOLOGY INC. Variable Costing Income Statement 2018 2019 Less: Cost of goods sold Available for sale Cost of goods sold Contribution margin Less: Selling and administrative costs 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 $65 per unit and had sales of 24,500 units in the current year, 2018. STI has no inventory on hand at the beginning of 2018 and is projecting sales of 27,500 units in 2019. STI is planning the same production level for 2019 as in 2018, 26,000 units. The variable manufacturing costs for STI are $16, and the variable selling costs are only $0.80 per unit. The fixed manufacturing costs are $234,000 per year, and the fixeed selling costs are $600 per year Required: 1. Prepare an income statement for each year using full costing. 2. Prepare an income statement for each year using variable costing. 3. Prepare a reconciliation of the difference each year in the operating income resulting from the full and variable costing methods. Complete this question by entering your answers in the tabs below. Required 2 Required 1 Required 3 Prepare a reconciliation of the difference each year in the operating income resulting from the full and variable costing methods. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your "Fixed overhead rate" answers to 2 decimal places, and other final answers to nearest whole dollar amount.) SECURITY TECHNOLOGY INC. Reconciling Difference in Operating Income Between Full and Variable Costing 2018 2019 Change in inventory in units Multiply times fixed overhead rate 0$ Difference in operating income Required 2 Required 3

Answer 1

absorption costing

	calculation	2018	calculation	2019
sales	24500 * 65	1,592,500	27500 * 65	1,787500
beginning inventory			1500 * 25	37,500
production cost	variable manufacture cost + fixed cost = 16 + 9 = 25 25 * 26,000	650,000	25 * 26,000	650,000
ending inventory	( 26000 - 24500 = 1500 ) 1500 * 25	37,500
gross profit	( 1592500 - 650000 + 37500)	980,000		1,100,000
variable selling expenses	24500 * 0.8	19600	27500*0.8	22000
fixed selling cost		600		600
operating income		783400		1,077,400

fixed cost per unit = total fixed cost / total production

234,000 / 26,000 = 9 per unit

variable costing

sales	24500 *65	1,592,500	27500 * 65	1,787,500
beginning inventory	0	0	1500 * 16	24000
production cost	26000 * 16	416,000	26000*16	416,000
ending inventory	1500 * 16	24000
margin		1200500		1347500
variable selling price	24500 * .8	19600	27500*.8	22000
contribution margin		1,180,900		1,325,500
fixed cost		234,000		234,000
fixed cost selling expenses		600		600
operating income		712300		1,090,900

product cost per unit = variable manufacturing cost

product cost = 16 per unit

3)

absorption costing operating income

2018 - 783400   operating income production > sales

2019- 1077400    operating income      production < sales

variable costing

2018 - 712,300 operating income production > sales

2019 - 1,090,900 operating income production < sales

	operating income
production = sales	absorption costing = variable costing
production > sales	absorption costing > variable costing
production < sales	absorption costing < variable costing

Absorption costing includes all costs, including fixed costs, related to production, while variable costing only includes the variable costs directly incurred in production. Companies that use variable costing keep fixed-cost operating expenses separate from production costs.