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 $(71,500$ units$)$ during the first month, creating an ending inventory of $6,500$ units. During February, the company produced $65,000$ units during the month but sold $71,500$ units at $$85$ 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 $6,500$ $$34\mathrm{.}00$ $$221,000$

Fixed $6,50013\mathrm{.}0084,500$

Total $$47\mathrm{.}00$ $$305,500$

Manufacturing costs in February:

Variable $65,000$ $$34\mathrm{.}00$ $$2,210,000$

Fixed $65,00014\mathrm{.}30929,500$

Total $$48\mathrm{.}30$ $$3,139,500$

Selling and administrative expenses in February:

Variable $71,500$ $$16\mathrm{.}90$ $$1,208,350$

Fixed $71,5007\mathrm{.}00500,500$

Total $$23\mathrm{.}90$ $$1,708,850$

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 Description Amount Amount

$$-$ Select $-$

Cost of goods sold:

$$-$ Select $-$

$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

$-$ Select $-$

$$-$ 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 Description Amount Amount

$$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

Fixed costs:

$$-$ Select $-$

$-$ Select $-$

$-$ Select $-$

$$-$ 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 $3$

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

$,$ 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 $3$

income statement will have a lower operating income.