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 (160,000 units) during the first month, creating an ending inventory of 25,000 units. During February, the company produced 135,000 units during the month but sold 160,000 units at $570 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	25,000		$285.00		$7,125,000
Fixed	25,000		20.00		500,000
Total			$305.00		$7,625,000
Manufacturing costs in February:
Variable	135,000		$285.00		$38,475,000
Fixed	135,000		23.10		3,118,500
Total			$308.10		$41,593,500
Selling and administrative expenses in February:
Variable	160,000		15.40		$2,464,000
Fixed	160,000		2.00		320,000
Total			17.40		$2,784,000

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.

Open spreadsheet

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
				$
Cost of goods sold:
		$
				$
				$

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
				$
				$
				$
Fixed costs:
		$
				$

c. What is the reason for the difference in the amount of Operating income reported in (a) and (b)?

Under the ––––– method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under  , all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory decreases, the ––––– income statement will have a lower Operating income.

Answer 1