VARIABLE COSTING VERSUS ABSORPTION COSTING. The Stenback Company uses an absorption$-$costing system based on standard costs. Variable manufacturing cost consists of direct material cost of $$4$ per unit and other variable manufacturing costs of $$1\mathrm{.}20$ per unit. The standard production rate is $20$ units per machine$-$hour. Total budgeted and actual fixed manufacturing overhead costs are $$520,000.$ Fixed manufacturing overhead is allocated at $$16$ per machine$-$hour based on fixed manufacturing costs of $$520,000-$: $32,500$ machine$-$hours, which is the level Stenback uses as its denominator level.The selling price is $$13$ per unit. Variable operating $($nonmanufacturing$)$ cost$,$ which is driven by units sold, is $$2$ per unit. Fixed operating $($nonmanufacturing$)$ costs are $$55,000.$ Beginning inventory in $2020$ is $35,000$ units; ending inventory is $45,000$ units. Sales in $2020$ are $575,000$ units.The same standard unit costs persisted throughout $2019$ and $2020.$ For simplicity, assume that there are no price, spending, or efficiency variances.

Required

$1.$ 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.

$2.$ The president has heard about variable costing. She asks you to recast the $2020$ 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?