Question

1A. At the end of the first year of operations, 4,700 units remained in the finished goods inventory. The unit manufacturing costs during the year were as follows:

Direct materials	$27.30
Direct labor	14.10
Fixed factory overhead	7.10
Variable factory overhead	6.20

Determine the cost of the finished goods inventory reported on the balance sheet under (a) the absorption costing concept and (b) the variable costing concept.

Absorption costing	$
Variable costing	$

1B. Shawnee Motors Inc. assembles and sells snowmobile engines. The company began operations on August 1 and operated at 100% of capacity during the first month. The following data summarize the results for August:

1	Sales (38,000 units)		$9,500,000.00
2	Production costs (46,500 units):
3	Direct materials	$4,650,000.00
4	Direct labor	1,860,000.00
5	Variable factory overhead	1,162,500.00
6	Fixed factory overhead	697,500.00	8,370,000.00
7	Selling and administrative expenses:
8	Variable selling and administrative expenses	$1,250,000.00
9	Fixed selling and administrative expenses	235,000.00	1,485,000.00

	Required:
a.	Prepare an income statement according to the absorption costing concept.*
b.	Prepare an income statement according to the variable costing concept.*
c.	What is the reason for the difference in the amount of income from operations reported in (a) and (b)? * Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. Enter all amounts as positive numbers.

Answer 1

1
a.	Unit product cost:
	Direct Material		$         27.30
	Direct Labour		$         14.10
	Varialble factory overhead		$            6.20
	Total Variable Cost		$         47.60
	Fixed factory overhead		$            7.10
	Unit product cost		$         54.70
b.	Under Variable Costing
	Unit product cost:
	Direct Material		$         27.30
	Direct Labour		$         14.10
	Varialble factory overhead		$            6.20
	Unit product cost		$         47.60
2	Absorbtion Costing Income Statement
	Sales(38,000)		$ 95,00,000
Less:	Cost of Goods Sold (38,000 X $180)		$ 68,40,000
	Gross Margin		$ 26,60,000
Less:	Selling and Administrative expenses ($12,50,000 + $2,35,000)		$ 14,85,000
	Net Operating Income		$ 11,75,000
	Unit product cost:
	Direct Material		$ 46,50,000
	Direct Labour		$ 18,60,000
	Varialble factory overhead		$ 11,62,500
	Total Variable Cost		$ 76,72,500
	Fixed factory overhead		$   6,97,500
	Total		$ 83,70,000
	Units produced		46,500
	Unit product cost		$             180
	Variable Costing Income Statement
	Sales(38,000)		$ 95,00,000
	Variable Cost of goods sold (38,000 X $165)		$ 62,70,000
	Manufacturing Margin		$ 32,30,000
Add:	Variable selling expenses		$ 12,50,000
	Contribution margin		$ 19,80,000
Less:	Fixed Expenses:
	Fixed Factory overhead	$   6,97,500
	Fixed Selling and Administrative expenses	$   2,35,000	$   9,32,500
	Net operating Income		$ 10,47,500