Absorption Statement Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold. Sales Saxon, Inc. Absorption Costing Income Statement For the Year Ended December 31 Cost of goods sold: Cost of goods manufactured Ending inventory Total cost of goods sold Gross profit Selling and administrative expenses Operating income $1,200,000 $840,000 (168,000) (672,000) $528,000 (273,000) $255,000 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 Sales For the Year Ended December 31 $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 Variable selling and administrative expenses Contribution margin $720,000 (208,000) $512,000