The Hoffman Company uses an absorption-costing system based on standard costs. Variable manufacturing cost consists of direct material cost of $ 4.00 per unit and other variable manufacturing costs of $ 1.80 per unit. The standard production rate is 20 units per machine-hour. Total budgeted and actual fixed manufacturing overhead costs are $ 520000. Fixed manufacturing overhead is allocated at $ 16 per machine-hour based on fixed manufacturing costs of $ 520 000 / 32500 machine-hours, which is the level Hoffman uses as its denominator level. The selling price is $ 18 per unit. Variable operating (nonmanufacturing) cost, which is driven by units sold, is $ 2 per unit. Fixed operating (nonmanufacturing) costs are $ 55000. Beginning inventory in 2017 is 35000 units; ending inventory is 45 000 units. Sales in 2017 are 575000 units. The same standard unit costs persisted throughout 2016 and 2017. For simplicity, assume that there are no price, spending, or efficiency variances.

1. Prepare an income statement for 2017 assuming that the production-volume variance is written off at year-end as an adjustment to cost of goods sold. 2. The president has heard about variable costing. She asks you to recast the 2017 statement as it would appear under variable costing. 3. Explain the difference in operating income as calculated in requirements 1 and 2. 4. 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. 5. 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?

Requirement 1. Prepare an income statement for 2017 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 Revenues: $10,350,000 Cost of goods sold: Beginning inventory: 581000 Variable manufacturing costs Allocated fixed manufacturing costs Cost of goods available for sale Deduct ending inventory Adjustment for production-volume variance Cost of goods sold Gross margin