The following data were adapted from a recent income statement of Procter & Gamble Company....

Question:

The following data were adapted from a recent income statement of Procter & Gamble Company:

Sales $ 84,167
Operating costs:
  Cost of products sold $ 42,428
  Marketing, administrative, and other expenses 30,337
      Total operating costs $ 72,765
Income from operations $11,402

Assume that the variable amount of each category of operating costs is as follows:

Cost of products sold $ 23,760
Marketing, administrative, and other expense 12,135

a. Based on the data given, prepare a variable costing income statement for Procter & Gamble Company, assuming that the company maintained constant inventory levels during the period. b. If Procter & Gamble reduced its inventories during the period, what impact would that have on the income from operations determined under absorption costing?

Variable Costing And Absorption Costing:

Variable costing is used only for internal reporting purposes, while absorption costing is mainly used for external reporting purposes. The difference between the two is the way fixed manufacturing overhead is recognized. Under variable costing, fixed manufacturing overhead is treated as a period cost while under absorption costing, it is treated as a product cost.

Answer and Explanation:

Requirement a

Since the inventory level is maintained, we can ascertain that the number of units sold and produced are also equal therefore variable costing and absorption costing will yield the same income as long as there are no changes in the fixed overhead per unit. Now let us present the variable costing income statement:

Sales $84,167
Variable costs
Cost of products sold 23,760
Marketing, administrative and other expenses 12,135 35,895
Contribution margin 48,272
Fixed costs
Cost of products sold 18,668
Marketing, administrative and other expenses 18,202 36,870
Operating income $11,402

Under the variable costing income statement, we are segregating the fixed cost and variable cost portion of each type of expense provided.

Requirement b

If inventory is reduced, it means that the number of products sold is greater than the number of units produced. Under absorption costing, fixed manufacturing overhead being recognized in the income statement will be greater than fixed manufacturing overhead under variable costing. Therefore, operating income under absorption costing will be lesser than operating income under variable costing.


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Variable Costing: Method, Formula & Advantages

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Chapter 13 / Lesson 5
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