Income Statements underAbsorption CostingandVariable Costing

Fresno Industries Inc. manufactures and sells high-quality camping tents. The company began operations on January 1 and operated at 100% of capacity (40,700 units) during the first month, creating an ending inventory of 3,700 units. During February, the company produced 37,000 units during the month but sold 40,700 units at $90 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:Variable3,700$36.00$133,200Fixed3,70014.0051,800Total$50.00$185,000Manufacturing costs in February:Variable37,000$36.00$1,332,000Fixed37,00015.40569,800Total$51.40$1,901,800Selling and administrative expenses in February:Variable40,700$18.20$740,740Fixed40,7007.00284,900Total$25.20$1,025,640

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

Fresno Industries Inc.Absorption Costing Income StatementFor the Month Ended February 28

$Cost of goods sold:

$

$

$

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

Fresno Industries Inc.Variable Costing Income StatementFor 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.