! Required information Learning Objective 06-P2: Prepare and analyze an income statement using absorption costing and using variable costing. The variable costing income statement differs from the absorption costing income statement in that it classifies expenses based on cost behavior rather than function. Instead of gross margin, the variable costing income statement shows contribution margin. This contribution margin format focuses attention on the relation between costs and sales that is not evident from the absorption costing format. Under absorption costing, some fixed overhead cost is allocated to ending inventory and is carried on the balance sheet to the next period. However, all fixed costs are expensed in the period incurred under variable costing. Consequently, absorption costing income is generally greater than variable costing income if units produced exceed units sold, and conversely. Income Reporting Product Costs Direct materials Direct labor .... Selling and Administrative Expenses $4 per unit Variable ..... $2 per unit $8 per unit Fixed ........ $200,000 per year Product Costs Direct materials Direct labor .......... Variable overhead Fixed overhead ........ Selling and Administrative Expenses $4 per unit Variable ..... $2 per unit $8 per unit Fixed .... $200,000 per year $3 per unit Sales $600,000 per year Sales price $40 per unit Units Produced Units Sold Units in Ending Inventory Year 1 ........... Year 2 Year 3 60,000 60,000 60,000 60,000 40,000 80,000 0 20,000 0 Knowledge Check 01 An income statement under absorption costing includes all of the following: (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.) ? Direct materials ? Direct labor ? Variable overhead ? Fixed overhead