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Absorption Statement Absorption costing does not distingulsh between variable and foced costs. All manufacturing costs are included in the cost of goods sold. Under varlable cesting, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a computatie manufacturing margin. 5 more Check My Work uses retnaining. Review the income statements on the Absarption Statement and Variable Statement, then complete the following table. The company's sales price per unit is s80, and the number of units in ending inventory is 4,000 . There was no beginning inventory. 5 more Check My Work Lses remaining. Manufacturing Decislons Whenever the units manufactured differ from the units sold, finished goods inventory is affected. in analyzing operating income, such increases and decreases could be misinterpreted as operating efidendes or ineffidendes. Each decision-making situation should be carefully analyred in deciding whether absorptian or variable costing reporting would be more useful. All costs are controllable in the long run by someone within a business. For a given level of management, costs may be controllable costs or noncontrol abie costs. The production manager for Saxon, Inc. Is womed because the company is not showing a high enough profit, topking at the income statements on the Absombian. Statement and the Variable Statement, he notices that the operating income is higher on the absorption cost income statement. He is considering manufacturing another 10,000 unts, up to the company's capacily for mamuacturing, in the coming year. He reasons that this will boost operating income and satiafy the company's owner that. the company is suthciently proftable. Although the total units manufactured changes, assume that total fixed costs, unit variable costs, unit sales price, and the sales leveis are the same. Complete questions (1)-(4) that follow. If the answer is zero, enter " 0. 1. Use the income statements on the Absomtion Statement and Variable Statement to complete the following tabie for the original production level. Then prepare similar income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variabie costs, unit sales price, and the sales leveis are the same at both production levels. 2. What is the change in operating income from producing 10,000 additional units under absorption costing? \$ 3. What is the change in operating income from producing 10,000 additional units under variable casting? 1 4. What would be your recommendation to the production manoger? - a. Do not produce the extra 10,000 units. The increase in operating income under absorption costing is due to fxed manufacturing costs being heid in inventory, and the additional leventory will lead to higher handiling, storage, finanding, and obsolescence costs. b. Produce the extra 10,000 units. Operating income will be increased, and the production manager will receive praise for creating higher profits. c. Do not broduce the extra 10.000 units. Operatina incorne does not change under absprotion costina when the additiongl units are oroduced