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Income statement:
An income statement is a financial statement that shows the income and expenses of the company in an accounting year. It calculates the net income of the company after deducting all expenses from the revenue generated by the company.
Absorption costing:
In this type of costing only variable costs are included to calculate the gross margin.
Variable costing:
In this type of costing only variable production costs are included to calculate the gross margin.
1.
a.
The unit sales are constant from year to year as the variable costing operating income is the same in all the years.
b.
The production in the first two years decreased and increased in the third and fourth years.
The ending inventory increased in the first two years and decreased in the third and fourth years.
2.
a.
The unit sales are not constant from year to year as the variable costing operating income is different in all the years.
b.
The production in the first two years increased and decreased in the third and fourth years.
The ending inventory decreased in the first two years and increased in the third and fourth years.
3.
According to me, the ending inventory increased in the starting period of a business. After a point when the sales of the company start increasing the ending inventory start decreasing. This is because the company become able to estimate the sales of the company. The absorption costing method is better than the variable costing method because it includes all costs incurred in the production.
Evaluating Absorption and Variable Costing as Alternative Costing Methods [ LO4 ] The questions below pertain to two different scenarios involving a manufacturing company. In each scenario, the cost structure of the company is constant from year to year.