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 (137,000 units) during the first month, creating an ending inventory of 25,000 units. During February, the company produced 112,000 units during the month but sold 137,000 units at $550 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	$275.00	$6,875,000
Fixed	25,000	23.00	575,000
Total		$298.00	$7,450,000
Manufacturing costs in February:
Variable	112,000	$275.00	$30,800,000
Fixed	112,000	26.50	2,968,000
Total		$301.50	$33,768,000
Selling and administrative expenses in February:
Variable	137,000	$17.70	$2,424,900
Fixed	137,000	4.00	548,000
Total		$21.70	$2,972,900

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 the month ending February 28.

Line Item Description	Amount	Amount
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 the month ending February 28.

Line Item Description	Amount	Amount
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 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.

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