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 $(150,000$ units$)$ during the first month, creating an ending inventory of $20,000$ units. During February, the company produced $130,000$ units during the month but sold $150,000$ units at $$500$ per unit. The February manufacturing costs and selling and administrative expenses were as follows:

$$Number of

UnitsUnit

CostTotal

CostManufacturing costs in February $1$ beginning inventory:$$Variable$20,000$$$275\mathrm{.}00$$$5,500,000$Fixed$20,00026\mathrm{.}00520,000$Total$$$$301\mathrm{.}00$$$6,020,000$Manufacturing costs in February:$$Variable$130,000$$$275\mathrm{.}00$$$35,750,000$Fixed$130,00030\mathrm{.}003,900,000$Total$$$$305\mathrm{.}00$$$39,650,000$Selling and administrative expenses in February:$$Variable$150,000$$$20\mathrm{.}00$$$3,000,000$Fixed$150,0001\mathrm{.}30195,000$Total$$$$21\mathrm{.}30$$$3,195,000$

Question Content Area

a$.$Prepare an income statement according to the absorption costing concept for the month ending February $28.$

Fresno Industries Inc.

Absorption Costing Income Statement

For the Month Ended February $28$Line Item DescriptionAmountAmount

Cost of goods manufacturedCost of goods soldGross profitSalesSelling and administrative expenses

$$-$ Select $-$Cost of goods sold:

Beginning inventoryCost of goods manufacturedCost of goods soldGross profitSelling and administrative expenses

$$-$ Select $-$

Cost of goods manufacturedCost of goods soldGross profitSalesSelling and administrative expenses

$-$ Select $-$

Cost of goods manufacturedGross profitSalesSelling and administrative expensesTotal cost of goods sold

$-$ Select $-$

Beginning inventoryCost of goods soldGross profitSalesSelling and administrative expenses

$$-$ Select $-$

Beginning inventoryCost of goods manufacturedGross profitSalesSelling and administrative expenses

$-$ Select $-$

Operating incomeLoss from operations

$$-$ Select $-$

Question Content Area

b$.$Prepare an income statement according to the variable costing concept for the month ending February $28.$

Fresno Industries Inc.

Variable Costing Income Statement

For the Month Ended February $28$Line Item DescriptionAmountAmount

Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expenses

$$-$ Select $-$

Contribution marginFixed manufacturing costsManufacturing marginVariable cost of goods soldVariable selling and administrative expenses

$-$ Select $-$

Contribution marginFixed manufacturing costsFixed selling and administrative expensesManufacturing marginVariable selling and administrative expenses

$$-$ Select $-$

Fixed manufacturing costsFixed selling and administrative expensesManufacturing marginVariable cost of goods soldVariable selling and administrative expenses

$-$ Select $-$

Contribution marginFixed manufacturing costsManufacturing marginVariable cost of goods soldVariable selling and administrative expenses

$$-$ Select $-$Fixed costs:

Contribution marginFixed manufacturing costsSalesVariable cost of goods soldVariable selling and administrative expenses

$$-$ Select $-$

Contribution marginFixed selling and administrative expensesSalesVariable cost of goods soldVariable selling and administrative expenses

$-$ Select $-$

Contribution marginManufacturing marginOperating incomeSalesTotal fixed costs

$-$ Select $-$

Operating incomeLoss from operations

$$-$ Select $-$

Question Content Area

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

Under the fill in the blank $1$ of $3$

absorption costingvariable costing

method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under fill in the blank $2$ of $3$

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 fill in the blank $3$ of $3$

absorption costingvariable costing

income statement will have a lower operating income.