(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 Balances	12/31/09		12/31/10		12/31/11
Direct Material	$22,000		$30,000		$10,000
Work in Process	Â		Â		Â
Costs	$40,000		$48,000		$64,000
Direct labor hours	1,335		1,600		2,100
Finished Goods	Â		Â		Â
Costs	$25,000		$18,000		$14,000
Direct labor hours	1,450		1,050		820
Â	Â		Â		Â
Â	Â	COMPARATIVE INCOME STATEMENTS
Â	Â	2010		Â		2011
Sales	Â	$840,000		Â		$1,015,000
Cost of goods sold	Â	Â		Â		Â
Finished goods, 1/1	$ 25,000	Â		$ 18,000		Â
Cost of goods manufactured	556,000	Â		673,600		Â
Total available	$581,000	Â		$691,600		Â
Finished goods, 12/31	(18,000)	Â		(14,000)		Â
CGS before overhead adjustment	$563,000	Â		$677,600		Â
Underapplied factory overhead	17,400	Â		19,300		Â
Cost of goods sold	Â	(580,400)		Â		(696,900)
Gross margin	Â	$259,600		Â		$ 318,100
Selling expenses	$ 82,000	Â		$ 95,000		Â
Administrative expenses	70,000	Â		75,000		Â
Total operating expenses	Â	(152,000)		Â		(170,000)
Operating income	Â	$107,600		Â		$ 148,100
Â	Â	Â	Â	Â	Â	Â

The 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	$ 25,000
Variable factory overhead	$155,000
Direct labor cost	$150,000
Direct labor hours	25,000

In 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.