Variable costing versus absorption costing. The Garvis Companyuses an absorption-costing system based on standard costs. Variablemanufacturing cost consists of direct material cost of $4.50 perunit and other variable manufacturing costs of $1.50 per unit. Thestandard production rate is 20 units per machine-hour. Totalbudgeted and actual fixed manufacturing overhead costs are$840,000. Fixed manufacturing overhead is allocated at $14 permachine-hour based on fixed manufacturing costs of$840,000÷60,000$840,000÷60,000 machine-hours, which is the levelGarvis uses as its denominator level.
The selling price is $10 per unit. Variable operating(nonmanufacturing) cost, which is driven by units sold, is $2 perunit. Fixed operating (nonmanufacturing) costs are $240,000.Beginning inventory in 2017 is 60,000 units; ending inventory is80,000 units. Sales in 2017 are 1,080,000 units.
The same standard unit costs persisted throughout 2016 and 2017.For simplicity, assume that there are no price, spending, orefficiency variances.

Prepare an income statement for 2017 assuming that theproduction-volume variance is written off at year-end as anadjustment to cost of goods sold.
Required
The president has heard about variable costing. She asks you torecast the 2017 statement as it would appear under variablecosting.
Explain the difference in operating income as calculated inrequirements 1 and 2.
Graph how fixed manufacturing overhead is accounted for underabsorption costing. That is, there will be two lines: one for thebudgeted fixed manufacturing overhead (which is equal to the actualfixed manufacturing overhead in this case) and one for the fixedmanufacturing overhead allocated. Show the production-volumevariance in the graph.
Critics have claimed that a widely used accounting system has ledto undesirable buildups of inventory levels. (a) Is variablecosting or absorption costing more likely to lead to such buildups?Why? (b) What can managers do to counteract undesirable inventorybuildups?