Question

Income statements under absorption costing and variable costing

Fresno Industries Inc. manufactures and sells high-quality camping tents. The company began operations on January 1 and operated at 100% of capacity (181,000 units) during the first month, creating an ending inventory of 17,000 units. During February, the company produced 164,000 units during the month but sold 181,000 units at $600 per unit. The February manufacturing costs and selling and administrative expenses were as follows:

	Number of Units		Unit Cost		Total Cost
Manufacturing costs in February 1 beginning inventory:
Variable	17,000		$300.00		$5,100,000
Fixed	17,000		26.00		442,000
Total			$326.00		$5,542,000
Manufacturing costs in February:
Variable	164,000		$300.00		$49,200,000
Fixed	164,000		30.00		4,920,000
Total			$330.00		$54,120,000
Selling and administrative expenses in February:
Variable	181,000		20.00		$3,620,000
Fixed	181,000		3.00		543,000
Total			23.00		$4,163,000

a. Prepare an income statement according to the absorption costing concept for February. Enter all amounts as positive numbers.

Fresno Industries Inc.
Absorption Costing Income Statement
For the Month Ended February 28
Sales				$
Cost of goods sold:
Beginning inventory		$
Cost of goods manufactured
Total cost of goods sold
Gross profit				$
Selling and administrative expenses
Operating income				$

b. Prepare an income statement according to the variable costing concept for February. Enter all amounts as positive numbers.

Fresno Industries Inc.
Variable Costing Income Statement
For the Month Ended February 28
Sales				$
Variable cost of goods sold
Manufacturing margin				$
Variable selling and administrative expenses
Contribution margin				$
Fixed costs:
Fixed manufacturing costs		$
Fixed selling and administrative expenses
Total fixed costs
Operating income

Answer 1

a)
Fresno Industries Inc.
Absorption Costing Income Statement
For the Month Ended February 28
Sales (181,000 units * $600 per unit)		$108,600,000
Less: Cost of Goods Sold:
Beginning Inventory	$5,542,000
Cost of goods manufactured	$54,120,000
Less: Ending Inventory (17,000 + 164,000 - 181,000)	$0
Total Cost of Goods Sold		($59,662,000)
Gross Profit		$48,938,000
Less: Selling and administrative expenses		($4,163,000)
Operating Income		$44,775,000
b)
Fresno Industries Inc.
Variable Costing Income Statement
For the Month Ended February 28
Sales (181,000 units * $600 per unit)		$108,600,000
Less: Variable cost of goods sold ($5,100,000 + $49,200,000)		($54,300,000)
Manufacturing margin		$54,300,000
Less: Variable selling and administrative expenses		($3,620,000)
Contribution margin		$50,680,000
Less: Fixed manufacturing costs ($442,000 + $4,920,000)	($5,362,000)
Less: Fixed selling and administrative expenses	($543,000)
Total Fixed costs		($5,905,000)
Operating Income		$44,775,000