Variable Costing: The variable costing is a method used to allocate the fixed manufacturing overhead by a company. It allocates these overheads to the period of production and not to the inventory left unsold or ending inventory. Absorption Costing: The absorption costing is a method used to allocate the fixed manufacturing overhead by a company. It allocates these overheads based on the inventory produced and inventory sold. It is based on the approach that the unsold inventory also consist some fixed manufacturing overhead incurred during a period. Income Statement: A part of periodical financial statements that reports the total earnings and expenses for a company or a unit of production is called income statement. To prepare: The income statements for company T under variable costing and absorption costing method.

Step 1. Determine the definitions of Variable Costing, Absorption Costing, and Income Statement: Variable Costing: The variable costing is a method used to allocate the fixed manufacturing overhead by a company. It allocates these overheads to the period of production and not to the inventory left unsold or ending inventory. Absorption Costing: The absorption costing is a method used to allocate the fixed manufacturing overhead by a company. It allocates these overheads based on the inventory produced and inventory sold. It is based on the approach that the unsold inventory also consist some fixed manufacturing overhead incurred during a period. Income Statement: A part of periodical financial statements that reports the total earnings and expenses for a company or a unit of production. Step 2. To prepare the income statements for company T under variable costing and absorption costing methods. Step 3. Explanation: - Spreadsheet to show the income statement under variable costing: Table (1). Company T has operating income of $2,936,810aspervariablecosting.-Spreadsheettoshowtheincomestatementunderabsorptioncosting:Table(2).CompanyThasoperatingincomeof$2,738,870 as per absorption costing. Step 4. To compute the operating income percentage under both the costing methods. Step 5. To explain the difference in operating income under both the costing methods. Step 6. To identify the better costing method to be recommended to the CFO of company Z.