Variable and Absorption Costing

The following data were adapted from a recent income statement of Ansara Company for the year ended December 31:

(in millions)
Sales	$26,980
Cost of goods sold	$(22,930)
Selling, administrative, and other expenses	(2,430)
Total expenses	$(25,360)
Operating income	$1,620

Assume that $5,880 million of cost of goods sold and $1,340 million of selling, administrative, and other expenses were fixed costs. Inventories at the beginning and end of the year were as follows:

Beginning inventory	$3,210
Ending inventory	$3,740

Also, assume that 30% of the beginning and ending inventories were fixed costs.

Question Content Area

a. Prepare an income statement according to the variable costing concept for Ansara Company. Round numbers to nearest million.

b. Explain the difference between the amount of operating income reported under the absorption costing and variable costing concepts. The income from operations under the variable costing concept be the same as the income from operations under the absorption costing concept when the inventories either increase or decrease during the year. In this case, Ansara's inventory , meaning it sold than it produced. As a result, the income from operations under the variable costing concept will be than the income from operations under the absorption costing concept. The reason is because the variable costing concept deduct the fixed costs in the period that they are incurred, regardless of changes in inventory balances