Question

Fresno Industries Inc. manufactures and sells high-quality camping tents. The company began operations on January 1 and operated at 100% of capacity (124,000 units) during the first month, creating an ending inventory of 18,000 units. During February, the company produced 106,000 units during the month but sold 124,000 units at $500 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	18,000		$250.00		$4,500,000
Fixed	18,000		38.00		684,000
Total			$288.00		$5,184,000
Manufacturing costs in February:
Variable	106,000		$250.00		$26,500,000
Fixed	106,000		43.90		4,653,400
Total			$293.90		$31,153,400
Selling and administrative expenses in February:
Variable	124,000		29.20		$3,620,800
Fixed	124,000		2.00		248,000
Total			31.20		$3,868,800

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 February. Enter all amounts as positive numbers.

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 February. Enter all amounts as positive numbers.

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.

Answer 1

a.

Sales		$ 6,20,00,000
Cost of Goods Sold
Beginning Inventory	$    51,84,000
Manufactured	$ 3,11,53,400
Total cost of goods sold		$ 3,63,37,400
Gross Profit		$ 2,56,62,600
Selling and administrative expenses		$      38,68,800
Net Operating Income		$ 2,17,93,800

b.

Variable Costing
Sales		$ 6,20,00,000
Variable Expenses
Cost of Goods Sold	$ 3,10,00,000		=4500000+26500000
Selling and administrative expenses	$    36,20,800
Total Variable Expenses		$ 3,46,20,800
Contribution Margin		$ 2,73,79,200
Fixed Expenses
Manufacturing Costs	$    46,53,400
Selling and administrative expenses	$      2,48,000
Total Variable Expenses		$      49,01,400
Net Operating Income		$ 2,24,77,800

c. Under the absorption costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under variable costing method, 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 absorption costing income statement will have a lower Operating income.