takeAssignmentSessionLocator=assignment-take&inprogres... * 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 $1,200,000 Cost of goods sold: Cost of goods manufactured $800,000 Ending inventory (200,000) Total cost of goods sold (600,000) Gross profit Selling and administrative expenses $600,000 (260,000) $340,000 Operating income Variable Statement Under variable costino, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a computation of manufacturing margin Variable Statement Under variable costing, the cost of goods manufactured indudes 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 $1,200,000 Variable cost of goods sold: Variable cost of goods manufactured $560,000 Ending inventory (140,000) Total variable cost of goods sold (420,000) Manufacturing margin $780,000 Variable selling and administrative expenses (195,000) Contribution margin $585,000 Fixed costs: Fixed manufacturing costs $240,000 Fixed selling and administrative expenses 65,000 Total fixed costs (305,000 Operating income $280,000 I AREA Method Comparison Review the income statements on the Absorption Statement and Variable Statement, then complete the following table. The company's sales price per unit is $80, and the number of units in ending inventory is 5,000. There was no beginning inventory Item Amount Number of units sold Variable sales and administrative cost per unit Number of units manufactured Variable cost of goods manufactured per unit Fixed manufacturing cost per unit Review the definitions of the items in the table, and think backwards from one of the income statements to get the desired values Manufacturing Decisions Manufacturing Decisions Whenever the units manufactured differ from the units sold, finished goods inventory is affected. In analyzing operating income, such increases and decreases could be misinterpreted as operating efficiencies or inefficiencies. Each decision-making situation should be carefully analyzed in deciding whether absorption or variable costing reporting would be more useful. All costs are controllable in the long run by someone within a business. For a given level of management, costs may be controllable costs or noncontrollable costs. The production manager for Saxon, Inc. is worried because the company is not showing a high enough profit. Looking at the income statements on the
