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 (15,500 units)				$2,170,000
   Production costs (20,000 units):
   Direct materials		$1,036,000
   Direct labor		498,000
   Variable factory overhead		248,000
   Fixed factory overhead		166,000		1,948,000
   Selling and administrative expenses:
   Variable selling and administrative expenses		$301,900
   Fixed selling and administrative expenses		116,900		418,800

   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

Part A

Shawnee Motors Inc.

Absorption Costing Income Statement

For the Month Ended August 31

Sales	2170000
Cost of goods sold (97.4*15500)	1509700
Gross profit	660300
Selling and administrative expenses (301900+116900)	418800
Income from operations	241500

Product cost per unit = (1036000/20000)+(498000/20000)+(248000/20000)+(166000/20000) = 97.4

Part B

Shawnee Motors Inc.

Variable Costing Income Statement

For the Month Ended August 31

Sales		2170000
Variable cost of goods sold (15500*89.1)		1381050
Manufacturing margin		788950
Variable selling and administrative expenses		301900
Contribution margin		487050
Fixed costs:
Fixed factory overhead	166,000
Fixed selling and administrative expenses	116,900	282900
Income from operations		204150

Product cost per unit = (1036000/20000)+(498000/20000)+(248000/20000) = 89.1

Part 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 , 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   absorption costing income statement will have a higher income from operations than will the variable costing income statement.