Comparison of variable costing and absorption costing. Hinkle Company uses standard costing.

Tim Bartina, the new president of Hinkle Company, is presented with the following data for 2012:

1	Hinkle Company
2	Income Statements for the Year Ended December 31, 2012
3		Variable	Absorption
4		Costing	Costing
5	Revenues	$9,000,000	$9,000,000
6	Cost of goods sold (at standard costs)	4,680,000	5,860,000
7	Fixed manufacturing overhead (budgeted)	1,200,000	-
8	Fixed manufacturing overhead variances (all unfavorable):
9	Spending	100,000	100,000
10	Production volume	-	400,000
11	Total marketing and administrative costs (all fixed)	1,500,000	1,500,000
12	Total costs	7,480,000	7,860,000
13	Operating income	$1,520,000	$1,140,000
14
15	Inventories (at standard costs)
16	December 31, 2011	$1,200,000	$1,720,000
17	December 31, 2012	66,000	206,000

1. At what percentage of denominator level was the plant operating during 2012?

2. How much fixed manufacturing overhead was included in the 2011 and the 2012 ending inventory under

absorption costing?

3. Reconcile and explain the difference in 2012 operating incomes under variable and absorption costing.

4. Tim Bartina is concerned : He notes that despite an increase in sales over 2011, 2012 operating income

has actually declined under absorption costing. Explain how this occurred.