Financial & Managerial Accounting 13th Edition by Carl Warren , James Reeve,Jonathan Duchac

Exercise 3

Income statements under absorption costing and variable costing
Bionic Cotton Inc. manufactures and sells high-quality sporting goods equipment under its highly recognizable Cool Cat logo. The company began operations on January 1, 2016, and operated at 100% of capacity (90,000 units) during the first month, creating an ending inventory of 8,000 units. During February, the company produced 82,000 garments during the month but sold 90,000 units at $100 per unit. The February manufacturing costs and selling and administrative expenses were as follows:

a. Prepare an income statement according to the absorption costing concept for February.
b. Prepare an income statement according to the variable costing concept for February.
c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?