Question

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

Answer 1

Answer with working and explanation is given below

$38,537 Caterpillar Inc Variable Costing Income Statement (assumed) For the year ended December 31 Sales Variable cost of goods sold: Beginning inventory $6,790 Add: Variable Cost of goods manufactured $18,723 Less: Closing inventory -$6,030 Total variable cost of goods sold $19,483 $19,054 $5,730 ($9,730-$4,000) $13,324 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) $8,500 $4,000 $12,500 $824 Working notes Cost of Goods manufactured Cost of goods sold Add: Closing inventory $28,309 $8,614 $36,923 $9,700 $27,223A Less: Opening inventory Cost of Goods manufactured Fixed manufacturing cost Variable cost of manufacturing $8,500 B $18,723 A-B Inventory Fixed cost Closing inventory 30% At variable cost Opening inventory Closing inventory $9,700 $8,614 $2,910 $2,584 $6,790 $6,030 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, Caterpillar Inventory decreased, meaning it sold more than it produced As a result, the income from operations under the variable costing concept will be higher 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