Mastery Problem: Variable Costing for Management Analysis Absorption vs. Variable Operating income is one of the most important items reported by a company. Depending on the decision-making needs of management, operating income can be determined using absorption costing or variable costing. Select whether the following characteristics are most often associated with absorption costing or variable costing. Absorption Statement Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold. Variable Statement Saxon, Inc. Variable Costing Income Statement For the Year Ended December 31 Sales Variable cost of goods sold: Fixed costs: Fixed manufacturing costs $240,000 Fixed selling and administrative expenses 65,000 Total fixed costs Operating income $287,000(305,000) inventory is 4,000 . There was no beginning inventory. Manufacturing Decisions 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 noncontrollable costs. levels. Operating Income 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 costing? $ 4. What would be your recommendation to the production manager? to higher handling, storage, financing, 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 produce the extra 10,000 units. Operating income does not change under absorption costing when the additional units are produced. d. Produce the extra 10,000 units. It's always a good idea to have extra units on hand and keep the factory operating at capacity, even if all the units are not sold