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. 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 R under variable costing.

Step 1. 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. 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 R under variable costing. Step 2. Explanation: Spreadsheet to show the income statement under variable costing. Step 3. 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 consists of some fixed manufacturing overhead incurred during a period. To prepare: The income statements for company H under absorption costing. Step 4. To explain: The difference in operating income under both the costing methods. Step 5. To explain: The incentives of bonus plan based on absorption costing and the required improvement of it.