Absorption vs. Variable Operating income is one of the most important items reported by a company. Depending on the decision-making needs of management, operating income can be determined using absorption costing or variable costing. Select whether the following characteristics are most often associated with absorption costing or variable costing. Required under generally accepted accounting principles (GAAP) Often used for internal use in decision making Cost of goods manufactured includes only variable manufacturing costs Used in reports prepared for external users Fixed factory overhead costs are not part of cost of goods manufactured Both fixed and variable factory costs are included in cost of goods sold and inventory 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 $1,125,000 Cost of goods sold: Cost of goods manufactured $840,000 Ending inventory (210,000)Ending inventory (210,000) Total cost of goods sold (630,000) Gross prot $495,000 Selling and administrative expenses (290,000) Operating income $205,000 Variable Statement Under variable costing, the cost oic 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 $1,125,000