Posted: January 10th, 2021

Since opening in 2009,Akron Aviation has built light aircraft

(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.Inventory Balances12/31/0912/31/1012/31/11Direct Material$22,000$30,000$10,000Work in ProcessCosts$40,000$48,000$64,000Direct labor hours1,3351,6002,100Finished GoodsCosts$25,000$18,000$14,000Direct labor hours1,4501,050820COMPARATIVE INCOME STATEMENTS20102011Sales$840,000$1,015,000Cost of goods soldFinished goods, 1/1$ 25,000$ 18,000Cost of goods manufactured556,000673,600Total available$581,000$691,600Finished goods, 12/31(18,000)(14,000)CGS before overhead adjustment$563,000$677,600Underapplied factory overhead17,40019,300Cost of goods sold(580,400)(696,900)Gross margin$259,600$ 318,100Selling expenses$ 82,000$ 95,000Administrative expenses70,00075,000Total operating expenses(152,000)(170,000)Operating income$107,600$ 148,100The same predetermined OH rate was used to apply overhead to production orders in 2010 and 2011. The rate was based on the following estimates:Fixed factory overhead$ 25,000Variable factory overhead$155,000Direct labor cost$150,000Direct labor hours25,000In 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.

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