Question

Variable and Absorption Costing

Ansara Company had the following abbreviated income statement for the year ended December 31, 20Y2:

(in millions)
Sales	$25,790
Cost of goods sold	$21,920
Selling, administrative, and other expenses	2,320
Total expenses	$24,240
Income from operations	$1,550

Assume that there were $5,620 million fixed manufacturing costs and $1,280 million fixed selling, administrative, and other costs for the year. The finished goods inventories at the beginning and end of the year from the balance sheet were as follows:

January 1	$3,060 million
December 31	$3,570 million

Assume that 20% of the beginning and ending inventory consists of fixed costs. Assume work in process and materials inventory were unchanged during the period.

a. Prepare an income statement according to the variable costing concept for Ansara Company for 20Y2.

Ansara Company
Variable Costing Income Statement
For the Year Ended December 31, 20Y2 (in millions)
		$
Variable cost of goods sold:
Beginning inventory	$
		$
		$
Fixed costs:
	$
		$

b. Explain the difference between the amount of income from operations 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, Ansara’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.

Answer 1

b. The operating income as per variable costing income statement is more compared to absorption costing