The Roberts Company sells its razors at $ 3 per unit. The company incurs fixed manufacturing overhead costs of $ 700,000 each year to support production of 1,400,000 units so that the fixed manufacturing overhead cost per unit equals $ 0.50 ($ 700,000 ÷ 1,400,000 units). The following data are related to its first 2 years of operation, all numbers are in thousands:

1. Prepare income statements based on variable costing for each of the 2 years.
2. Prepare income statements based on absorption costing for each of the 2 years.
3. Prepare a numerical reconciliation and explanation of the difference between operating income for each year under absorption costing and variable costing.
4. Critics have claimed that a widely used accounting system has led to undesirable buildups of inventory levels.
(a) Is variable costing or absorption costing more likely to lead to such buildups? Why?
(b) What can be done to counteract undesirable inventorybuildups?

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Sales Production Costs 2012 1,000 units 1,400 units 2013 1,200 units 1,000 units Variable manufacturing Fixed manufacturing Variable operating (marketing) Fixed operating (marketing) 700 700 1,000 400 $500 700 1,200 400