The following data were adapted from a recent income statement of Procter & Gamb

Question

The following data were adapted from a recent income statement of Procter & Gamble Company: 1 (in millions) 2 Sales $84,349.00 3 Operating costs: 4 Cost of products sold $42,519.00 5 Marketing, administrative, and other expenses 30,400.00 6 Total operating costs $72,919.00 7 Income from operations $11,430.00 Assume that the variable amount of each category of operating costs is as follows: 1 (in millions) 2 Cost of products sold $23,755.00 3 Marketing, administrative, and other expenses 12,125.00 Required: 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. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. A colon (:) will automatically appear if it is required. If a net loss is incurred, enter that amount as a negative number using a minus sign. B. If Procter & Gamble reduced its inventories during the period, what impact would that have on the income from operations determined under absorption costing? Labels and Amount Descriptions Labels Fixed costs Amount Descriptions Contribution margin Contribution margin ratio Fixed manufacturing costs Fixed marketing, administrative, and other expenses Income from operations Loss from operations Manufacturing margin Planned contribution margin Sales Sales mix Variable cost of products sold Variable marketing, administrative, and other expenses Variable Costing Income Statement 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. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. A colon (:) will automatically appear if it is required. If a net loss is incurred, enter that amount as a negative number using a minus sign. Procter & Gamble Company Variable Costing Income Statement (assumed) (in millions) 1 2 3 4 5 6 (Label) 7 8 9 Final Question B. If Procter & Gamble reduced its inventories during the period, what impact would that have on the income from operations determined under absorption costing? Income from operations would be the same. Income from operations would be lower. Income from operations would be higher.

Explanation / Answer

A) VARIABLE COSTING INCOME STATEMENT: Sales 84349 Variable cost of goods sold 23755 Gross contribution margin 60594 Variable Cost of selling & administration 12125 Contribution margin 48469 Less: Fixed costs: Manufacturing 18764 Marketing & Administration 18275 37039 Net operating income 11430 B) If Procter & Gamble reduced its inventories during the period,      the income from operations determined under absorption costing would be lower. The reason is that fixed cost element in the opening stock would be more than the fixed cost element in the closing stock, resulting in the charging of more than one period's fixed costs to the cost of goods sold.

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