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Absorption Statement Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold. Saxon, Inc. Absorption Costing Income Statement For the Year Ended December 31 Sales $1,200,000 Cost of goods sold: Cost of goods manufactured $840,000 Ending inventory (168,000) Total cost of goods sold (672,000) Gross profit $528,000 Selling and administrative expenses (305,000) Operating income $223,000 Variable Statement Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a computation of manufacturing margin. Saxon, Inc. Variable Costing Income Statement For the Year Ended December 31 Sales $1,200,000 Variable cost of goods sold: Variable cost of goods manufactured $600,000 Ending inventory (120,000) Total variable cost of goods sold (480,000) Manufacturing margin $720,000 Variable selling and administrative expenses (240,000) Contribution margin $480,000 Fixed costs Fixed manufacturing costs $240,000 Fixed selling and administrative expenses 65,000 Total fixed costs (305,000) Operating Income $175,000 Method Comparison Review the income statements on the Absorption Statement and Variable Statement, then complete the following table. The company's sales price per unit is $75, and the number of units in ending inventory is 4,000. There was no beginning inventory. Item Amount Number of units sold 16,000 Variable sales and administrative cost per unit $ 15 Number of units manufactured 20,000 Variable cost of goods manufactured per unit $ 30 Fixed manufacturing cost per unit 12 1. Use the Income statements on the Absorption Statement and Variable Statement to complete the following table for the original production level. Then prepare similar Income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels. Original Production Level-Absorption $ 239,000 X Operating Income Original Production Additional 10,000 Level-Variable Units-Absorption $ 191,000 x Additional 10,000 Units-Variable 2. What is the change in operating income from producing 10,000 additional units under absorption costing? 3. What is the change in operating income from producing 10,000 additional units under variable costing? 4. What would be your recommendation to the production manager? due to fixed manufacturing costs being held in inventory, and the additional a. Do not produce the extra 10,000 units. The increase in operating income under absorption costing inventory will lead to higher handling, storage, financing, and obsolescence costs. b. Produce the extra 10,000 units. Operating income will be increased, and the production manager will receive praise for creating higher profits. c. Do not produce the extra 10,000 units. Operating income does not change under absorption costing when the additional units are produced. d. Produce the extra 10,000 units. It's always a good idea to have extra units on hand and keep the factory operating at capacity, even if all the units are not sold

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