Chapter 2: An Introduction to Cost Terms and Purposes Lecture Example Comparison of Costing Methods: Absorption versus Variable Costing The Jonas Company sells its razors at $7 per unit. The company incurs fixed manufacturing overhead costs of $480,000 each year to support production of 1,600,000 units so that the fixed manufacturing overhead cost per unit equals $0.30 ($ 480, 000/1,600,000 units). The #following data are related to its first 2 years of operation, all numbers are in thousands: Year 1 Year 2 Sales 1,050 units 1,200 units Production 1,600 units 1,050 units Costs Variable manufacturing(DM/DL costs, factory overhead) 480 420 Fixed manufacturing 480 480 Variable operating (marketing) 1300 1200 Fixed operating (marketing) 600 600 Requirements: 1. Prepare income statements based on absorption costing for each of the 2 years. 2. Prepare income statements based on variable costing for each of the 2 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