Haselbach GmbH sells its razors at €3 per unit. The company uses a first-in, first-out actual- costing system. A new fixed manufacturing overhead allocation rate is calculated each year by dividing the actual fixed manufacturing overhead cost by the actual production units. The following simplified data are related to its first two years of operation:

1 Prepare income statements based on (a) variable costing and (b) absorption costing for

each year.

2 Prepare a reconciliation and explanation of the difference in the operating profit for each year resulting from the use of absorption costing and variable costing.

3 Critics have claimed that a widely used accounting system has led to undesirable stock- building levels. (a) Is variable costing or absorption costing more likely to lead to such build-ups? Why? (b) What can be done to prevent undesirable stock build-ups?