Variable and Absorption Costing

The following data were adapted from a recent income statement of Caterpillar Inc. (CAT) for the year ended December 31:

Assume that $10,575 million of cost of goods sold and $5,000 million of selling, administrative, and other expenses were fixed costs. Inventories at the beginning and end of the year were as follows: Also, assume that 30% of the beginning and ending inventories were fixed costs. a. Prepare an income statement according to the variable costing concept for Caterpillar Inc. 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 operating income under the variable costing concept be the same as the operating income under the absorption costing concept when the inventories either increase or decrease during the year. In this case, Caterpillar's inventory, , meaning it sold than it manufactured. As a result, the operating income under the variable costing concept will be than the operating income 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