Question

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

(in millions)
Sales $21,920
Cost of goods sold $18,630
Selling, administrative, and other expenses 1,970
Total expenses $20,600
Income from operations $1,320
Assume that there were $4,820 million fixed manufacturing costs and $1,100 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 $2,630 million
December 31 $3,070 million
Assume that 30% 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)
Sales $ 21,920
Variable cost of goods sold:
Beginning inventory $ 1,841
Variable cost of goods manufactured 13,810
Ending inventory 2,149
Total variable cost of goods sold
Manufacturing margin $
Variable selling and administrative expenses 870
Contribution margin $
Fixed costs:
Fixed manufacturing costs $ 4,820
Fixed selling and administrative expenses 1,100
Total fixed costs 5,920
Income from operations $
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 more 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

Ansara Company

a. Ansara Company Variable Costing Income Statement

For the Year Ended December 31, 20Y2 (in millions)

Sales $ 21,920

Variable cost of goods sold:

Beginning inventory $ 1,841

Variable cost of goods manufactured 13,810

Ending inventory 2,149

Total variable cost of goods sold 17,800

Manufacturing margin $4,120

Variable selling and administrative expenses 870

Contribution margin $3,250

Fixed costs:

Fixed manufacturing costs $ 4,820

Fixed selling and administrative expenses 1,100

Total fixed costs 5,920

Income from operations $2,670

b. Explanation of the difference between the amount of income from operations reported under absorption costing and variable costing concepts:

The difference occurs as a result of cost of inventory at the beginning and at the end. Under variable costing concept, the fixed manufacturing costs does not form part of the product costs. They are treated as period costs. But under absorption costing, fixed manufacturing costs form part of the product costs.

Step-by-step explanation:

a) Data:

Ansara Company Abbreviated Income Statement for the year ended December 31, 20Y2: (in millions):

Sales $21,920

Cost of goods sold $18,630

Gross profit $3,290

Selling, administrative, and

other expenses 1,970

Income from operations $1,320

b) Absorption costing concept is a costing technique that includes the full cost of manufacturing (i.e. cost of direct materials, direct labor, and all fixed production costs or overheads) in the product costs. Under variable costing concept, the full cost of manufacturing is not included in the product costs. Instead, all the variable costs (direct materials, direct labor, and variable overhead, whether factory or not) are included, while fixed manufacturing overheads are treated as period costs and expensed.