Question

1. Income Statements under Absorption and Variable Costing

   Shawnee Motors Inc. assembles and sells MP3 players. 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:

   Sales (16,500 units)				$2,640,000
   Production costs (21,000 units):
   Direct materials		$1,243,200
   Direct labor		596,400
   Variable factory overhead		298,200
   Fixed factory overhead		199,500		2,337,300
   Selling and administrative expenses:
   Variable selling and administrative expenses		$362,300
   Fixed selling and administrative expenses		140,200		502,500

   If required, round interim per-unit calculations to the nearest cent.

   a. Prepare an income statement according to the absorption costing concept.

   Shawnee Motors Inc.
   Absorption Costing Income Statement
   For the Month Ended August 31
   	$
   	$
   	$

   b. Prepare an income statement according to the variable costing concept.

   Shawnee Motors Inc.
   Variable Costing Income Statement
   For the Month Ended August 31
   		$
   		$
   		$
   Fixed costs:
   	$
   		$

   c. What is the reason for the difference in the amount of income from operations 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 increases, the   income statement will have a higher income from operations than will the variable costing income statement.

Answer 1

Answer:

(A)

Income Statement Under Absorption costing as on August 31

(B) Income Statement under Variable Costing as on August 31

(c) Differences between Absorption and Variable costing.

• Absorption costing is the total costing technique.So under Absorption costing all costs are included as product costs. However in Marginal(variable)costing only variable costs are treated as product costs.
• In Absorption costing closing stock is valued at total cost and Variable costing closing stock is valued at variable costs.Hence comparing to Variable costing Absorption costing is results in higher valuation of inventories.
• In Variable costing the managerial decisions are guided by Contribution which is the excess of sales over variable costs. However in Absorption costing Managerial decision making is based upon the Profit which is the excess of sales value over total cost.

In the above problem there is huge differences are arised when compare it we understand

Profit under Absorption costing is --> 408728.25

Profit under Variable costing is --> 337735.35

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Difference   70992.9

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