Q1	Q2	Q3
Beginning inventory (units)	0	800	600
Budgeted units to be produced	60,000	60,000	60,000
Actual units produced	61,000	59,500	60,800
Units sold	60,200	59,700	60,800
Variable manufacturing costs per unit produced	$60	$60	$60
Variable selling costs per unit sold	$20	$20	$20
Fixed manufacturing costs	$3,000,000	$3,000,000	$3,000,000
Fixed selling costs	$900,000	$900,000	$900,000
Selling price per unit	$180	$180	$180

There are no price, efficiency, or spending variances, and any production-volume variance is directly written off to cost of goods in the quarter in which it occurs.

a) Prepare income statements for Q1, Q2, and Q3 using variable costing and absorption costing.

b) Explain the differences in operating income between the two costing systems for each quarter. Be specific!

Question #2

a) Under which inventory costing method would managers have an incentive to build excess inventory? What is it about that method that provides the incentive? Be sure to justify your answer.

b) What steps can a manager take to reduce the incentive to build excess inventory? Be specific!

Question #3

a) How does the choice of the denominator level capacity impact income reported under variable costing? Be sure to justify your answer.

b) How does the choice of the denominator level capacity impact income reported under full absorption costing? Be sure to justify your answer.