Comparison of actual costing methods. Rehe Company sells its razors at $3 per unit.

1O.p erating income for 2008, The company uses a first-in, first-out actual costing system. A fixed manufacturing cost

$400 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:

REQUIRED . 1. Prepare income statements based on variable costing for each of the two years.
2. Prepare income statements 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?LO1

Transcribed Image Text:

2008 2009 Sales Production 1,000 units 1,200 units 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