Variable and Absorption Costing

The following data were adapted from a recent income statement of Caterpillar Inc. $($CAT$)$ for the year ended December $31$:

Line Item Description $($in millions$)$

Sales $$26,800$

Cost of goods sold $$(22,780)$

Selling, administrative, and other expenses $(2,410)$

Total expenses $$(25,190)$

Operating income $$1,610$

Assume that $$5,840$ million of cost of goods sold and $$1,330$ million of selling, administrative, and other expenses were fixed costs. Inventories at the beginning and end of the year were as follows:

Line Item Description Amount

Beginning inventory $$3,180$

Ending inventory $3,710$

Also, assume that $20\%$ of the beginning and ending inventories were fixed costs.

Question Content Area

a$.$ Prepare an income statement according to the variable costing concept for Caterpillar Inc. Round numbers to nearest million.

Caterpillar Inc.

Variable Costing Income Statement $($assumed$)$

For the Year Ended December $31$

$($In millions$)$

Line Item Description Amount Amount

$$-$ Select $-$

Variable cost of goods sold:

Beginning inventory $Beginning inventory

$-$ Select $-$

$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

Fixed costs:

$$-$ Select $-$

$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

Question Content Area

b$.$ Explain the difference between the amount of operating income reported under the absorption costing and variable costing concepts.

The operating income under the variable costing concept fill in the blank $1$ of $5$

will

be the same as the operating income under the absorption costing concept when the inventories either increase or decrease during the year. In this case, Caterpillar$$s inventory fill in the blank $2$ of $5$

increased

$,$ meaning it sold fill in the blank $3$ of $5$

less

than it manufactured. As a result, the operating income under the variable costing concept will be fill in the blank $4$ of $5$

than the operating income under the absorption costing concept. The reason is because the variable costing concept fill in the blank $5$ of $5$

deduct the fixed costs in the period that they are incurred, regardless of changes in inventory balances.