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 (36,300 units) during the first month, creating an ending inventory of 3,300 units. During February, the company produced 33,000 units during the month but sold 36,300 units at $120 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 3,300 $48.00 $158,400 Fixed 3,300 18.00 59,400 Total $66.00 $217,800 Manufacturing costs in February: Variable 33,000 $48.00 $1,584,000 Fixed 33,000 19.80 653,400 Total $67.80 $2,237,400 Selling and administrative expenses in February: Variable 36,300 $23.40 $849,420 Fixed 36,300 7.00 254,100 Total $30.40 $1,103,520 . Prepare an income statement according to the absorption costing concept for the month ending February 28. . Prepare an income statement according to the variable costing concept for the month ending February 28. 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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Chapter7: Variable Costing For Management analysis

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Problem 3E: Fresno Industries Inc. manufactures and sells high-quality camping tents. The company began...

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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 (36,300 units) during the first month, creating an ending inventory of 3,300 units. During February, the company produced 33,000 units during the month but sold 36,300 units at $120 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	3,300		$48.00		$158,400
Fixed	3,300		18.00		59,400
Total		$66.00		$217,800
Manufacturing costs in February:
Variable	33,000		$48.00		$1,584,000
Fixed	33,000		19.80		653,400
Total		$67.80		$2,237,400
Selling and administrative expenses in February:
Variable	36,300		$23.40		$849,420
Fixed	36,300		7.00		254,100
Total		$30.40		$1,103,520

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

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

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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