Question

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 $28,550 Cost of goods sold Selling, administrative, and other expenses $(24,270) (2,570) Total expenses $(26,840) Operating income $1,710 Assume that $6,280 million of cost of goods sold and $1,430 million of selling, administrative, and other expenses were fixed costs. Inventories at the beginning and end of the year were as follows: Beginning inventory Ending inventory $3,430 $4,000 Also, assume that 20% 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 Variable cost of goods sold: Beginning inventory

Answer 1

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$28,550 Ansara Company Variable Costing Income Statement (assumed) For the year ended December 31 Sales Variable cost of goods sold: Beginning inventory $2,744 Add: Variable Cost of goods manufactured $18,560 Less: Closing inventory -$3,200 Total variable cost of goods sold $18,104 $10,446 $1,140 ($2,570-$1,430) $9,306 Less: Variable selling administrative and other expenses Contribution Margin Less: Fixed Cost Cost of Goods sold Selling, administrative and other expenses Total fixed cost Operating Income/(Loss) $6,280 $1,430 $7,710 $1,596 Working notes Cost of Goods manufactured Cost of goods sold Add: Closing inventory $24,270 $4,000 $28,270 $3,430 $24,840 A Less: Opening inventory Cost of Goods manufactured Fixed manufacturing cost Variable cost of manufacturing $6,280 B $18,560 A-B Inventory Fixed cost Closing inventory 20% At variable cost Opening inventory Closing inventory $3,430 $4,000 $686 $800 $2,744 $3,200 b) The income from operations under the variable costing concept will not be same as the income from operations under the absorption costing when the inventories either increase or decreases during the year In this case, Ansara Inventory increased, meaning it sold less than it produced As a result, the income from operations under the variable costing concept will be lower than the income under the absorption costing concept. The reason is because the variable costing concept will deduct the fixed costs in the period that they are incurred, regardless of changes in inventory balances