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 (45,100 units) during the first month, creating an ending inventory of 4,100 units. During February, the company produced 41,000 units during the month but sold 45,100 units at $75 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	4,100		$30.00		$123,000
Fixed	4,100		11.00		45,100
Total		$41.00		$168,100
Manufacturing costs in February:
Variable	41,000		$30.00		$1,230,000
Fixed	41,000		12.10		496,100
Total		$42.10		$1,726,100
Selling and administrative expenses in February:
Variable	45,100		$14.30		$644,930
Fixed	45,100		7.00		315,700
Total		$21.30		$960,630

Question Content Area

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

Beginning inventoryCost of goods manufacturedGross 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 -
Beginning inventoryCost of goods manufacturedGross profitSelling and administrative expensesTotal cost of goods sold		- Select -
Cost of goods manufacturedCost 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.

Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expenses		$- Select -
Contribution marginManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expenses		- Select -
Fixed manufacturing costsManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expenses		$- Select -
Contribution marginManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expenses		- Select -
Contribution marginFixed manufacturing costsFixed selling and administrative expensesManufacturing marginSales		$- Select -
Fixed costs:
Contribution marginFixed manufacturing costsSalesVariable cost of goods soldVariable selling and administrative expenses	$- Select -
Fixed selling and administrative expensesManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expenses	- Select
Contribution marginOperating incomeManufacturing marginSalesTotal 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

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.