Variable and Absorption Costing The following data were adapted from a recent income statement of Caterpillar Inc. (CAT) for the year ended December 31: (in millions) $38,537 Sales Cost of goods sold $(28,309) (9,730) Selling, administrative, and other expenses Total expenses $(38,039) $498 Operating income Assume that $8,500 million of cost of goods sold and $4,000 million of selling, administrative, and other expenses were fixed costs. Inventories at the beginning and end of the year were as follows: Beginning inventory $9,700 Ending inventory 8,614 Also, assume that 30% of the beginning and ending inventories were fixed costs. 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 Variable cost of goods sold: Beginning inventory Fixed costs: b. Explain the difference between the amount of operating income reported under the absorption costing and variable costing concepts. The income from operations under the variable costing concept be the same as the income from operations under the absorption costing concept when the inventories either increase or decrease during the year. In this case, Caterpillar's inventory , meaning it sold than it produced. As a result, the income from operations under the variable costing concept will be than the income from operations under the absorption costing concept. The reason is because the variable costing concept deduct the fixed costs in the period that they are incurred, regardless of changes in inventory balances.
Variable and Absorption Costing The following data were adapted from a recent income statement of Caterpillar Inc. (CAT) for the year ended December 31: (in millions) $38,537 Sales Cost of goods sold $(28,309) (9,730) Selling, administrative, and other expenses Total expenses $(38,039) $498 Operating income Assume that $8,500 million of cost of goods sold and $4,000 million of selling, administrative, and other expenses were fixed costs. Inventories at the beginning and end of the year were as follows: Beginning inventory $9,700 Ending inventory 8,614 Also, assume that 30% of the beginning and ending inventories were fixed costs. 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 Variable cost of goods sold: Beginning inventory Fixed costs: b. Explain the difference between the amount of operating income reported under the absorption costing and variable costing concepts. The income from operations under the variable costing concept be the same as the income from operations under the absorption costing concept when the inventories either increase or decrease during the year. In this case, Caterpillar's inventory , meaning it sold than it produced. As a result, the income from operations under the variable costing concept will be than the income from operations under the absorption costing concept. The reason is because the variable costing concept deduct the fixed costs in the period that they are incurred, regardless of changes in inventory balances.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Variable and Absorption Costing
The following data were adapted from a recent income statement of Caterpillar Inc. (CAT) for the year ended December 31:
Transcribed Image Text:Variable and Absorption Costing
The following data were adapted from a recent income statement of Caterpillar Inc. (CAT) for the year ended December 31:
(in millions)
$38,537
Sales
Cost of goods sold
$(28,309)
(9,730)
Selling, administrative, and other expenses
Total expenses
$(38,039)
$498
Operating income
Assume that $8,500 million of cost of goods sold and $4,000 million of selling, administrative, and other expenses were fixed costs. Inventories
at the beginning and end of the year were as follows:
Beginning inventory
$9,700
Ending inventory
8,614
Also, assume that 30% of the beginning and ending inventories were fixed costs.
Transcribed Image Text: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
Variable cost of goods sold:
Beginning inventory
Fixed costs:
b. Explain the difference between the amount of operating income reported under the absorption costing and variable costing concepts.
The income from operations under the variable costing concept
be the same as the income from operations under the absorption
costing concept when the inventories either increase or decrease during the year. In this case, Caterpillar's inventory
, meaning it
sold
than it produced. As a result, the income from operations under the variable costing concept will be
than
the income from operations under the absorption costing concept. The reason is because the variable costing concept
deduct the
fixed costs in the period that they are incurred, regardless of changes in inventory balances.
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