Examine the Trahn Company’s simplified income statement based on variable costing. Assume
that the budgeted volume for absorption costing in 20X0 and 20X1 was 1,400 units and that total
fixed costs were identical in 20X0 and 20X1. There is no beginning or ending work in process.

1. Prepare an income statement based on absorption costing. Assume that actual fixed costs
were equal to budgeted fixed costs.
2. Explain the difference in operating income between absorption costing and variable costing.
Be specific.

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Income statement Year ended 31 December 20X1 Sales, 1,260 units at €13 Deduct variable costs Beginning inventory, 100 units at €7 Variable manufacturing cost of goods manufactured, 1,200 units at €7 Variable manufacturing cost of goods available for sale Ending inventory, 40 units at €7 Variable manufacturing cost of goods sold Variable selling and administrative expenses Total variable costs Contribution margin Deduct fixed costs Fixed factory overhead at budget Fixed selling and administrative expenses Total fixed costs Operating income € 700 8,400 €9,100 280 €8,820 600 €4,900 350 €16,380 9,420 € 6,960 5,250 € 1,710