Reference no: EM131563638

Problem - The Daniels Tool & Die Corporation has been in existence for a little over three years. The company's sales have been increasing each year as it builds a reputation. The company manufactures dies to its customers' specifications and therefore uses a job-order cost system. Factory overhead is applied to the jobs based on direct labour hours-the absorption-costing (full) method. Overapplied or underapplied overhead is treated as an adjustment to Cost of Goods Sold. The company's income statements and other data for the last two years are as follows:

Daniels Tools & Die Corporation Inventory Balances
	January 1, 2015	December 31, 2015	December 31, 2016
Raw materials	$21,000	$29,100	$10,300
Work in process	$40,200	$47,000	$63,000
Direct labour hours (used in WIP)	1,320	1,620	2,440
Finished goods	$24,400	$17,100	$13,400
Direct labour hours (used in FG)	1,520	1,060	850

 

DANIELS TOOL & DIE CORPORATION 2015-2016 Comparative Income Statements
	2015	2016
Sales	$839,800	$1,015,100
Cost of goods sold
Finished goods, January 1	24,400	17,100
Cost of goods manufactured	543,00	657,800
Total available	567,400	674,900
Finished goods, December 31	17,100	13,400
Cost of goods sold before overhead adjustment	550,300	661,500
Underapplied factory overhead	35,000	14,200
Cost of goods sold	585,300	675,700
Gross profit	254,500	339,400
Selling expenses	81,100	94,800
Administrative expenses	69,500	74,800
Total operating expenses	150,600	169,600
Operating income	$103,900	$169,800

Daniels used the same predetermined overhead rate in applying overhead to its production orders in both 2015 and 2016. The rate was based on the following estimates:

Fixed factory overhead - $24,750

Variable factory overhead - $153,450

Direct labour hours (used in WIP) - 24,750

Direct labour costs (used in FG) - $148,500

In 2015 and 2016, the actual direct labour hours used was 20,700 and 23,700, respectively. Raw materials put into production were $291,900 in 2015 and $370,600 in 2016. The actual fixed overhead was $42,700 for 2015 and $28,260 for 2016, and the planned direct labour rate was the direct labour achieved.

For both years, all of the administrative costs were fixed. The variable portion of the selling expenses results from a 5% commission that is paid as a percentage of the sales revenue.

Prepare an incremental analysis to determine if Current Designs should purchase the new rotomould oven, assuming that the average price for natural gas over the next 10 years will be $0.70 per therm.

For the year ended December 31, 2016, prepare a revised income statement for Daniels Tool & Die Corporation using the variable-costing method.