Examine the Trahn Company’s simplified income statement based on variable costing for 2011. Assume that the budgeted volume for absorption costing in 2010 and 2011 was 1,400 units and that total fixed costs were identical in 2010 and 2011. There is no beginning or ending work-in-process.

1. Prepare an income statement based on absorption costing for 2011. 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.

Income Statement Year ended December 31, 2011 Sales, 1,260 units @ $13 $16,380 Deduct variable costs Beginning inventory, 100 units @ $7 Variable manufacturing cost of goods manufactured, 1,200 units @ $7 $ 700 8,400 Variable manufacturing cost of goods available for sale 9,100 Ending inventory, 40 units @ $7 Variable manufacturing cost of goods sold Variable selling and administrative expenses 280 8,820 600 Total variable costs 9,420 Contribution margin 6,960 Deduct fixed costs Fixed factory overhead at budget Fixed selling and administrative expenses 4,900 350 Total fixed costs 5,250 Operating income 1,710