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 $42 per unit and had sales of 24,650 units in the current year, 2018. STI has no inventory on hand at the beginning of 2018 and is projecting sales of 27,950 units in 2019. STI is planning the same production level for 2019 as in 2018, 26,300 units. The variable manufacturing costs for STI are $13, and the variable selling costs are only $0.40 per unit. The fixed manufacturing costs are $184,100 per year, and the fixed selling costs are $630 per year. 1. Prepare an income statement for 2012 and 2013 using full costing. 2. Prepare an income statement for 2012 and 2013 using variable costing. 3. Prepare a reconciliation and explanation of the difference each year in the operating income resulting from the full - and variable-costing methods.

Prepare an income statement for 2012 and 2013 using full costing.

2012 2013

Sales 1,035,300 1,173,900

Less Cost of Sales (493,000) (559,600)

Opening Stock 0 33,600

Add Manufacturing Cost ($20*26,300) 526,000 526,000

Less Closing Stock (33,000) 0

Gross Profit 542,300 614,300

Less Expenses:

Fixed selling costs (630) (630)

Variable selling costs (9,860) (11,180)

Net Income 531,810 602,490

Prepare an income statement for 2012 and 2013 using variable costing.

2012 2013

Sales 1,035,300 1,173,900

Less Cost of Sales (320,450) (363,350)

Opening Stock 0 21,450

Add Manufacturing Cost ($13*26,300) 341,900 341,900

Less Closing Stock (21,450) 0

Contribution 714,850 810,550

Less Expenses:

Fixed manufacturing costs (184,100) (184,100)

Fixed selling costs (630) (630)

Variable selling costs (9,860) (11,180)

Net Income 520,260 614,640

Reconciliation of Full Costing Profit to Variable Costing Profit

2012 2013

Full Costing Profit 531,810 602,490

Add Opening Stock 0 33,000

Less Closing Stock (33,000) 0

Variable Costing Profit 498,810 635,490

Explanation:

Full Costing Product Cost = Direct Material + Direct Labor + Variable Overheads + Fixed Overheads

= $13 + ($184,100/26,300 units)

= $20

Prepare an income statement for 2012 and 2013 using full costing.

2012 2013

Sales 1,035,300 1,173,900

Less Cost of Sales (493,000) (559,600)

Opening Stock 0 33,600

Add Manufacturing Cost ($20*26,300) 526,000 526,000

Less Closing Stock (33,000) 0

Gross Profit 542,300 614,300

Less Expenses:

Fixed selling costs (630) (630)

Variable selling costs (9,860) (11,180)

Net Income 531,810 602,490

Variable Costing Product Cost = Direct Material + Direct Labor + Variable Overheads

= $13

Prepare an income statement for 2012 and 2013 using variable costing.

2012 2013

Sales 1,035,300 1,173,900

Less Cost of Sales (320,450) (363,350)

Opening Stock 0 21,450

Add Manufacturing Cost ($13*26,300) 341,900 341,900

Less Closing Stock (21,450) 0

Contribution 714,850 810,550

Less Expenses:

Fixed manufacturing costs (184,100) (184,100)

Fixed selling costs (630) (630)

Variable selling costs (9,860) (11,180)

Net Income 520,260 614,640

Reconciliation of Full Costing Profit to Variable Costing Profit

2012 2013

Full Costing Profit 531,810 602,490

Add Opening Stock 0 33,000

Less Closing Stock (33,000) 0

Variable Costing Profit 498,810 635,490