Tomm's T's is a New York-based company that produces and sells t-shirts. The firm uses variable costing for internal purposes and absorption costing for external purposes. At year-end, financial information must be converted from variable costing to absorption costing to satisfy external requirements.

At the end of 2020, management anticipated that 2021 sales would be 20 percent above 2020 levels. Thus, production for 2021 was increased by 20 percent to meet the expected demand. However, economic conditions in \(2021 \mathrm{kept}\) sales at the 2020 unit level of 40,000 . The following data pertain to 2020 and 2021 :

Per-unit production costs (budgeted and actual) for 2020 and 2021 were:

Annual fixed costs for 2020 and 2021 (budgeted and actual) were:

The predetermined \(\mathrm{OH}\) rate under absorption costing is based on an annual capacity of 60,000 units. Any volume variance is assigned to Cost of Goods Sold. Taxes are to be ignored.

a. Present the 2021 income statement based on variable costing.

b. Present the 2021 income statement based on absorption costing.

c. Explain the difference, if any, in the income figures. Assuming that there is no Work in Process Inventory, provide the entry necessary to adjust the book income amount to the financial statement income amount if an adjustment is necessary.

d. The company finds it worthwhile to develop its internal financial data on a variable costing basis. What advantages and disadvantages are attributed to variable costing for internal purposes?

e. Many accountants believe that variable costing is appropriate for external reporting; many others oppose its use for external reporting. List the arguments for and against the use of variable costing in external reporting.

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Selling price per unit. Sales (units)... Beginning inventory (units). Production (units)... Ending inventory (units) 2020 2021 $ 22 $ 22 40,000 40,000 4,000 4,000 40,000 48,000 4,000 ?