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Variable Costing Income Statement

The following data were adapted from a recent income statement of The Procter & Gamble Company $($PG$)$:

Line Item Description $($in millions$)$

Sales $$201,050$

Operating costs:

Cost of products sold $$(96,500)$

Marketing, administrative, and other expenses $(64,340)$

Total operating costs $$(160,840)$

Operating income $$40,210$

Assume that the variable amount of each category of operating costs is as follows:

Line Item Description $($in millions$)$

Cost of products sold $$54,280$

Marketing, administrative, and other expenses $26,140$

Question Content Area

a$.$ Based on the data given, prepare a variable costing income statement for Procter & Gamble, assuming that the company maintained constant inventory levels during the period.

The Procter & Gamble Company

Variable Costing Income Statement $($assumed$)$

$($in millions$)$

Line Item Description Amount Amount

Sales

$Sales

$201,050$

Variable cost of products sold

Variable cost of products sold

$54,280$

Manufacturing margin

$Manufacturing margin

Variable marketing, administrative, and other expenses

Variable marketing, administrative, and other expenses

$26,140$

Contribution margin

$Contribution margin

Fixed costs:

Fixed manufacturing costs

$Fixed manufacturing costs

Fixed marketing, administrative, and other expenses

Fixed marketing, administrative, and other expenses

blank

Total fixed costs

Total fixed costs

Operating income

$Operating income

$40,210$

Question Content Area

b$.$ If Procter & Gamble reduced its inventories during the period, what impact would that have on the operating income determined under absorption costing?

If Procter & Gamble reduced its inventories during the period, then the cost of products sold would fill in the blank $1$ of $3$

fixed costs allocated to the beginning inventories. Thus, the total fixed costs of products sold on the absorption costing income statement would be fill in the blank $2$ of $3$

$,$ and the operating income would be fill in the blank $3$ of $3$

$.$

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