the company rsquo s inventory balances for the past three years and income statement 641291

(Absorption costing vs. variable costing) Since opening in 2009,Akron Aviation has built light aircraft engines and has gained a reputation for reliable and quality products. Factory overhead is applied to production using direct labor hours and any underapplied or overapplied overhead is closed at year end to Cost of Goods Sold. The company’s inventory balances for the past three years and income statements for the past two years follow.

The same predetermined OH rate was used to apply overhead to production orders in 2010 and 2011. The rate was based on the following estimates:

In 2010 and 2011, actual direct labor hours expended were 20,000 and 23,000, respectively. Raw material costing $292,000 was issued to production in 2010 and $370,000 in 2011. Actual fixed overhead was $37,400 for 2010 and $42,300 for 2011, and the planned direct labor rate per hour was equal to the actual direct labor rate. Actual variable overhead was equal to applied variable overhead.

For both years, all of the reported administrative costs were fixed. The variable portion of the reported selling expenses results from a commission of 5 percent of sales revenue.

a. For the year ending December 31, 2011, prepare a revised income statement using the variable costing method. b. Describe both the advantages and disadvantages of using variable costing.