a. Prepare an income statement according to the absorption costing concept for February. Enter all amounts as positive numbers. b. Prepare an income statement according to the variable costing concept for February. Enter all amounts as positive numbers. 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.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Fresno Industries Inc. manufactures and sells high-quality camping tents. The company began operations on January 1 and operated at 100% of capacity (192,000 units) during the first month, creating an ending inventory of 21,000 units. During February, the company produced 171,000 units during the month but sold 192,000 units at $560 per unit. The February
| Number of Units | Unit Cost | Total Cost |
||||
| Manufacturing costs in February 1 beginning inventory: | ||||||
| Variable | 21,000 | $280.00 | $5,880,000 | |||
| Fixed | 21,000 | 24.00 | 504,000 | |||
| Total | $304.00 | $6,384,000 | ||||
| Manufacturing costs in February: | ||||||
| Variable | 171,000 | $280.00 | $47,880,000 | |||
| Fixed | 171,000 | 27.70 | 4,736,700 | |||
| Total | $307.70 | $52,616,700 | ||||
| Selling and administrative expenses in February: | ||||||
| Variable | 192,000 | 18.50 | $3,552,000 | |||
| Fixed | 192,000 | 2.00 | 384,000 | |||
| Total | 20.50 | $3,936,000 |
a. Prepare an income statement according to the absorption costing concept for February. Enter all amounts as positive numbers.
b. Prepare an income statement according to the variable costing concept for February. Enter all amounts as positive numbers.
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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