\ariable costing versus absorption costing. The Mavis Company uses an absorption costing system based on standard costs. Ibtal variable manufacturing costs, including direct materials costs, were $3.60 per unit; the standard production rate was ten units per machine-hour. Iotal budgeted and actual fixed manufacturing overhead costs were $420,000. Fixed manufacturing overhead was allocated at $7 per machine-hour ($420,000 60,000 machine-hours of denomi¬

nator level). The selling price is $6 per unit. Variable marketing and administrative costs, which are driven by units sold, were $1 per unit. Fixed marketing and administrative costs were

$120,000. Beginning inventory in 2007 was 30,000 units; ending inventory was 40,000 units, bales in 2007 were 540,000 units. The same standard unit costs persisted throughout 2006 and 2007. For simplicity, assume that there were no price, spending, or efficiency variances.

Required 1. Prepare an income statement for 2007 assuming that all under- or overallocated overhead is written off directly at year-end as an adjustment to cost of goods sold.
2. The president has heard about variable costing. She asks you to recast the 2007 statement as it would appear under variable costing. Explain the difference in operating income as calculated in requirements 1 and 2.
3. Graph how fixed manufacturing overhead is accounted for under absorption costing. There will be two lines, one for the budgeted fixed overhead (which is equal to the actual fixed manufacturing overhead in this case) and one for the fixed overhead allocated. Show how the over- or underallocated manufacturing overhead might be indicated on the graph.