Rehe Company sells its razors at $3 per unit. The company uses a first-in, first-out actual costing system. A fixed manufacturing cost rate is computed at the end of each year by dividing the actual fixed manufacturing costs by the actual production units. The following data are related to its first two years of operation:
2015 2016
Sales...........................................1,000 units......1,200 units
Production....................................1,400 units......1,000 units
Costs:
Variable manufacturing............................$ 700............$ 500
Fixed manufacturing..................................700..............700
Variable operating (marketing)....................1,000............1,200
Fixed operating (marketing)..........................400.............400
Required
1. Prepare operating statements of comprehensive income based on variable costing for each of the two years.
2. Prepare operating statements of comprehensive income based on absorption costing for each of the two years.
3. Prepare a numerical reconciliation and explanation of the difference between operating income for each year under absorption costing and variable costing.
4. Critics have claimed that a widely used accounting system has led to undesirable buildups of inventory levels. (a) Is variable costing or absorption costing more likely to lead to such buildups? Why? (b) What can be done to counteract undesirable inventory buildups?