Question

# Income Statements under Absorption Costing and Variable Costing Fresno Industries Inc. manufactures and sells high-quality camping...

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 (50,600 units) during the first month, creating an ending inventory of 4,600 units. During February, the company produced 46,000 units during the month but sold 50,600 units at \$110 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 4,600 \$44.00 \$202,400 Fixed 4,600 17.00 78,200 Total \$61.00 \$280,600 Manufacturing costs in February: Variable 46,000 \$44.00 \$2,024,000 Fixed 46,000 18.70 860,200 Total \$62.70 \$2,884,200 Selling and administrative expenses in February: Variable 50,600 \$22.10 \$1,118,260 Fixed 50,600 7.00 354,200 Total \$29.10 \$1,472,460

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 \$ Cost of goods sold: \$ \$ \$

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 \$ \$ \$ 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.

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