Variable and Absorption Costing The following data were adapted from a recent income statement of Caterpillar Inc. (CAT) for the year ended December 31: (in millions) Sales Cost of goods sold Selling, administrative, and other expenses $38,537 $(28,309) (9,730) Total expenses $(38,039) Operating income $498 Assume that $8,500 million of cost of goods sold and $4,000 million of selling, administrative, and other expenses were fixed costs. Inventories at the beginning and end of the year were as follows: Beginning inventory $9,700 Ending inventory 8,614 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 Caterpillar Inc. Variable Costing Income Statement (assumed) For the Year Ended December 31 Variable cost of goods sold: Beginning inventory Fixed costs: 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, Caterpillar'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