The Daniels Tool & Die Corporation has been in existence for a little over three years;its sales have been increasing each year as it has built a reputation.The company manufactures dies to its customers' specifications;as a consequence,a job order cost system is employed.Factory overhead is applied to the jobs based on direct labor hours.Actual variable overhead is the same as applied variable overhead.Overapplied or underapplied overhead is treated as an adjustment to cost of goods sold.The company's income statements for the last two years are presented below.Daniels used the same predetermined overhead rate in applying overhead to production orders in both 2010 and 2011.The rate was based on the following estimates:

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In 2009 and 2010,actual direct labor hours expended were 20,000 and 23,000,respectively.Raw materials put into production were $292,000 in 2009 and $370,000 in 2010.Actual fixed overhead was $37,400 for 2010 and $42,300 for 2009,and the planned direct labor rate was the direct labor rate achieved.For both years,all of the reported administrative costs were fixed,while the variable portion of the reported selling expenses result from a commission of five percent of sales revenue.Required:(1)For the year December 31,2010,prepare a revised income statement for Daniels Tool & Die Corporation utilizing the variable costing method.Be sure to include the contribution margin on your statement.(2)Prepare a numerical reconciliation of the difference in operating income between Daniels Tool & Die Corporation's costing and the revised 2010 income statement prepared on the basis of variable costing.(3)Describe both the advantages and disadvantages of using variable costing. 11ea6e70_bd64_97b1_8f54_bd7a072cae87_TB1699_00 
 11ea6e70_bd64_bec2_8f54_d9d1d0475fbe_TB1699_00 Please see Feedback for answers.
 Feedback: (1) 11ea6e70_bd64_e5d3_8f54_d1cba2a15f09_TB1699_00 Supporting Calculations Fixed overhead rate = $25,000/25,000hours = $1 per hour Calculation of variable finished goods inventory at 1/1/10. 11ea6e70_bd64_e5d4_8f54_d35e66bad45c_TB1699_00 Calculation of variable cost work-in-process inventory at 1/1/10 11ea6e70_bd64_e5d5_8f54_e3c71479c16a_TB1699_00 Calculation of variable manufacturing costs incurred during 2010 11ea6e70_bd64_e5d6_8f54_59e3e628ddbc_TB1699_00 Calculation of direct labor and variable overhead rates. 11ea6e70_bd64_e5d7_8f54_ad74e24655a2_TB1699_00 Calculation of variable cost work-in-process inventory at 12/31/10 11ea6e70_bd64_e5d8_8f54_f953fe1eaf57_TB1699_00 Calculation of variable cost finished goods inventory at 12/31/10. 11ea6e70_bd64_e5d9_8f54_c5811fabfe18_TB1699_00 Calculation of variable selling expenses. 11ea6e70_bd65_0cea_8f54_3fe2f46cd8c5_TB1699_00 Calculation of fixed selling expenses. 11ea6e70_bd65_0ceb_8f54_23edfc052af3_TB1699_00 (2)The difference in the operating income of $270 is caused by the different treatment of fixed manufacturing overhead.Under full costing,fixed overhead costs are assigned to inventory and are not expensed until the goods are sold.Under variable costing,these costs are treated as expenses in the period incurred.Since the direct labor hours in the work-in-process and finished goods inventories had a net increase of 270 hours,the full costing operating profit is higher because the fixed factory overhead associated with the increased labor hours in inventory is not expensed when full costing is used. 11ea6e70_bd65_0cec_8f54_236f169f13a3_TB1699_00 The increase in hours (270)times the fixed overhead rate ($1 per hour)equals the difference in
operating income ($270).(3)The advantages of using variable costing follow.
The fixed manufacturing costs are reported at incurred values,not at absorbed values,which increases the likelihood of better control over fixed costs.
 Profits are directly influenced by changes in sales volume and not by changes in inventory levels.
 Contribution margin by product line,territory,department,or division is emphasized and more readily ascertainable the disadvantages of using variable costing follow.
 Variable costing is not acceptable for tax reporting,for SEC reporting,nor for external financial reporting;therefore,companies need to keep two sets of records.
 Costs other than variable costs,i.e. ,fixed costs and total production costs,may be ignored when making decisions,especially long-term decisions.
 With the advancement of factory technology and the movement toward a fully automated factory,the fixed factory overhead may be a significant portion of the production costs.To ignore these significant costs in inventory valuation may not be acceptable.

The Daniels Tool & Die Corporation Has Been in Existence