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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 (146,000 units) during the first month, creating an ending inventory of 25,000 units. During February, the company produced 121,000 units during the month but sold 146,000 units at $520 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		$260.00		$6,500,000
Fixed	25,000		31.00		775,000
Total			$291.00		$7,275,000
Manufacturing costs in February:
Variable	121,000		$260.00		$31,460,000
Fixed	121,000		35.80		4,331,800
Total			$295.80		$35,791,800
Selling and administrative expenses in February:
Variable	146,000		23.80		$3,474,800
Fixed	146,000		4.00		584,000
Total			27.80		$4,058,800

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
Beginning inventoryCost of goods manufacturedGross profitSalesSelling and administrative expenses				$fill in the blank 3
Cost of goods sold:
Beginning inventoryContribution marginCost of goods soldGross profitSelling and administrative expenses		$fill in the blank 5
Cost of goods manufacturedCost of goods soldGross profitSalesSelling and administrative expenses		fill in the blank 7
Beginning inventoryCost of goods manufacturedGross profitSelling and administrative expensesTotal cost of goods sold				fill in the blank 9
Cost of goods manufacturedCost of goods soldGross profitSalesSelling and administrative expenses				$fill in the blank 11
Beginning inventoryCost of goods manufacturedGross profitSalesSelling and administrative expenses				fill in the blank 13
Operating incomeLoss from operations				$fill in the blank 15

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
Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expenses				$fill in the blank 17
Contribution marginManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expenses				fill in the blank 19
Fixed manufacturing costsManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expenses				$fill in the blank 21
Contribution marginManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expenses				fill in the blank 23
Contribution marginFixed manufacturing costsFixed selling and administrative expensesManufacturing marginSales				$fill in the blank 25
Fixed costs:
Contribution marginFixed manufacturing costsSalesVariable cost of goods soldVariable selling and administrative expenses		$fill in the blank 27
Fixed selling and administrative expensesManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expenses		fill in the blank 29
Contribution marginManufacturing marginOperating incomeSalesTotal fixed costs				fill in the blank 31
Operating incomeLoss from operations				$fill in the blank 33

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

Under the

absorption costingvariable costing

method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under

absorption costingvariable costing

, 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

absorption costingvariable costing

income statement will have a lower Operating income.