Since opening in 2012, 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 2013 and 2014. The rate was based on the following estimates:
Fixed factory overhead ..........$ 25,000
Variable factory overhead ........$ 155,000
Direct labor cost ............$ 150,000
Direct labor hours ............ 25,000
In 2013 and 2014, actual direct labor hours expended were 20,000 and 23,000, respectively. Raw material costing $ 292,000 was issued to production in 2013 and $ 370,000 in 2014. Actual fixed overhead was $ 37,400 for 2013 and $ 42,300 for 2014, 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, 2014, prepare a revised income statement using the variable costing method.
b. Describe both the advantages and disadvantages of using variablecosting.

Inventory Balances Direct Material Work in Process 12/31/12 $22,000 $40,000 12/31/13 $30,000 $48,000 12/31/14 $10,000 $64,000 Costs Direct labor hours 1,335 1,600 2,100 Finished Goods Costs Direct labor hours $25,000 $18,000 $14,000 1,450 1.050 820 COMPARATIVE INCOME STATEMENTS 2013 2014 Sales Cost of goods sold S 840,000 $1,015,000 Finished goods, 1/1 Cost of goods manufactured 25,000 556,000 Total available Finished goods, 12/31 CGS before overhead adjustment S56305 Underapplied factory overead17,400 $ 18,000 673,600 $691,600 (14,000) gg77.ZO 19,300 $581,000 (18,000) Cost of goods sold Gross margin Selling expenses Administrative expenses 580,400) $259,600 696,900) S 318,100 $ 82,000 70,000 S 95,000 75,000 170,000) S 148,100 Total ope rating expenses 152,000) $107,600 Operating income