The Donaldson Company uses an absorption$-$costing system based on standard costs. Variable manufacturing cost consists of direct material cost of $$5\mathrm{.}00$ per unit and other variable

manufacturing costs of $$1\mathrm{.}00$ per unit. The standard production rate is $10$ units per machine$-$hour. Total budgeted and actual fixed manufacturing overhead costs are $$390,000.$ Fixed

manufacturing overhead is allocated at $$6$ per machine$-$hour based on fixed manufacturing costs of $$390,00065,000$ machine$-$hours, which is the level Donaldson uses as its

denominator level. The selling price is $$12$ per unit. Variable operating $($nonmanufacturing$)$ cost$,$ which is driven by units sold, is $$2$ per unit. Fixed operating $($nonmanufacturing$)$ costs

are $$180,000.$ Beginning inventory in $2020$ is $25,000$ units; ending inventory is $55,000$ units. Sales in $2020$ are $570,000$ units. The same standard unit costs persisted throughout $2019$

and $2020.$ For simplicity, assume that there are no price, spending, or efficiency variances.

Read the requirements.

Requirement $1.$ Prepare an income statement for $2020$ assuming that the production$-$volume variance is written off at year$-$end as an adjustment to cost of goods sold.

Complete the top half of the income statement first, then complete the bottom portion. $($Label the variance as favorable $($F$)$ or unfavorable $($U$).)$

Absorption costing

Requirements

Prepare an income statement for $2020$ assuming that the production$-$volume variance is written off

at year$-$end as an adjustment to cost of goods sold.

The president has heard about variable costing. She asks you to recast the $2020$ statement as it

would appear under variable costing.

Explain the difference in operating income as calculated in requirements $1$ and $2.$

Graph how fixed manufacturing overhead is accounted for under absorption costing. That is$,$ there will

be two lines: one for the budgeted fixed manufacturing overhead $($which is equal to the actual fixed

manufacturing overhead in this case$)$ and one for the fixed manufacturing overhead allocated. Show

the production$-$volume variance in the graph.

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 managers do to counteract undesirable inventory buildups?