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 (124,000 units) during the first month, creating an ending inventory of 19,000 units. During February, the company produced 105,000 units during the month but sold 124,000 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	19,000		$300.00		$5,700,000
Fixed	19,000		38.00		722,000
Total			$338.00		$6,422,000
Manufacturing costs in February:
Variable	105,000		$300.00		$31,500,000
Fixed	105,000		43.90		4,609,500
Total			$343.90		$36,109,500
Selling and administrative expenses in February:
Variable	124,000		29.20		$3,620,800
Fixed	124,000		1.00		124,000
Total			30.20		$3,744,800

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
				$
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.