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Top management at Hancock explained to the consultant that a difficult business environment for the firm in $2018$ and $2019$ had

caused the firm to reduce its price and production levels and reduce its fixed manufacturing costs in response to the decline in sales.

Even with the price reduction, there was a decline in sales in both years. This led to an increase in inventory in $2018,$ which the firm

was able to reduce in $2019$ by further reducing the level of production. In both years, Hancock's actual production was less than the

budgeted level so that the overhead rate for fixed overhead, calculated from budgeted production levels, was too low, and a

production volume variance was calculated to adjust cost of goods sold for the underapplied fixed overhead $($the calculation of the

production volume variance is explained fully in Chapter $15$ and reviewed briefly below$).$

The production volume variance for $2018$ was determined from the fixed overhead rate of $$175$ per unit budgeted

units$).$ Because the actual production level was $520$ units short of the budgeted level in $2018(5,000-4,480),$ the amount of the

production volume variance in $2018$ was $520$$$175=$$$91,000.$ The production volume variance is underapplied because the actual

production level is less than budgeted, and the production volume variance is therefore added back to cost of goods sold to

determine the amount of cost of goods sold in the full costing income statement. The full costng income statement for $2018$ is shown

below:

Sales

Cost of goods sold:

Beginning inventory

Cost of goods produced

Cost of goods available for sale

Less ending inventory

Cost of goods sold:

Plus unfavorable production volume variance

Adjusted cost of goods sold

Gross margin

Less selling and administrative costs

Variable

Fixed

Operating income

$8,799,000$

$[$$$1,100,000],[6,160,000],[$$$7,260,000],[1,485,000]$

$$5,775,000$

$91,000$

$$5,866,000$

$$2,933,000$

$$525,000$

$645,000$

$$2,288,000$

Required:

Using the full costing method, prepare the income statement for $2019.$

$2-$a$.$ Using variable costing, prepare an income statement for each period.

$2-$b$.$ Prepare a reconciliation of the difference each year in the operating income resulting from the full$-$ and variable$-$costing methods.

Complete this question by entering your answers in the tabs below.

Req $1$

Using the full costing method, prepare the income statement for $2019.$

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