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	$24,930
Cost of goods sold	$(21,190)
Selling, administrative, and other expenses	(2,240)
Total expenses	$(23,430)
Operating income	$1,500

Assume that $5,430 million of cost of goods sold and $1,230 million of selling, administrative, and other expenses were fixed costs. Inventories at the beginning and end of the year were as follows:

Beginning inventory	$2,960
Ending inventory	$3,460

Also, assume that 40% of the beginning and ending inventories were fixed costs.

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

Ansara Company
Variable Costing Income Statement (assumed)
For the Year Ended December 31
Contribution margin		$fill in the blank 68d2b7fed021025_2
Variable cost of goods sold:
Beginning inventory	$fill in the blank 68d2b7fed021025_3
Manufacturing margin	fill in the blank 68d2b7fed021025_5
	fill in the blank 68d2b7fed021025_7
		fill in the blank 68d2b7fed021025_9
		$fill in the blank 68d2b7fed021025_11
		fill in the blank 68d2b7fed021025_13
		$fill in the blank 68d2b7fed021025_15
Fixed costs:
	$fill in the blank 68d2b7fed021025_17
	fill in the blank 68d2b7fed021025_19
		fill in the blank 68d2b7fed021025_21
		$fill in the blank 68d2b7fed021025_23

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, Ansaras 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.