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Variable Costing Income Statement

The following data were adapted from a recent income statement of The Bluth Company:

$($in millions$)$

Sales $$276,320$

Operating costs:

Cost of products sold $$(132,630)$

Marketing, administrative, and other expenses $(88,420)$

Total operating costs $$(221,050)$

Operating income $$55,270$

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

$($in millions$)$

Cost of products sold $$74,610$

Marketing, administrative, and other expenses $35,920$

Question Content Area

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

The Bluth Company

Variable Costing Income Statement $($assumed$)$

$($in millions$)$

Sales

$Sales

Variable cost of products sold

Variable cost of products sold

Manufacturing margin

$Manufacturing margin

Variable marketing, administrative, and other expenses

Variable marketing, administrative, and other expenses

Contribution margin

$Contribution margin

Fixed costs:

Fixed manufacturing costs

$Fixed manufacturing costs

Fixed marketing, administrative, and other expenses

Fixed marketing, administrative, and other expenses

Total fixed costs

Total fixed costs

Operating income

$Operating income

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a$.$ Sales $-$ variable cost of products sold $=$ Manufacturing margin; Manufacturing margin $-$ variable marketing, administrative, and other expenses $=$ Contribution margin; Contribution margin $-($fixed manufacturing costs $+$ fixed marketing, administrative and other expenses$)=$ operating income

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

If the Bluth company reduced its inventories during the period, then the cost of products sold would

include

fixed costs allocated to the beginning inventories. Thus, the total fixed costs of products sold on the absorption costing income statement would be

higher

$,$ and the operating income would be

lower

$.$

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b$.$ Remember under variable costing, the cost of goods manufactured includes only variable manufacturing costs. Therefore, fixed factory overhead costs are treated as a period expense. However, under absorption costing, both fixed and variable factory costs are included as part of factory overhead.

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