A firm sells its products at $8.00 per unit. The firm uses a first-in, first-out actual-costing system. In each period a new rate for allocating fixed manufacturing costs is computed by dividing the periods actual fixed manufacturing costs by the periods actual production units. The following simplified data relate to its first two years of operations.

Prepare income statement based on full absorption costing for each of the years. Also, calculate the inventory balance (in dollars) at the end of years 1 and 2.

Prepare income statement based on variable costing for each of the years. Also, calculate the inventory balance (in dollars) at the end of years 1 and 2.

Explain the different operating profit figures in each of the years by focusing on the cost category which is treated differentially across the two costing systems.

Sales Production Year 1 500 units 1,000 units Year 2 1,000 units 700 units $ 400 Costs Variable manufacturing Fixed manufacturing Variable marketing and administrative Fixed marketing and administrative $ 1,400 350 800 400 100 200 500