Question

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 (12,500 units) $1,875,000 Production costs (16,000 units): Direct materials $888,000 Direct labor 425,600 Variable factory overhead 212,800 Fixed factory overhead 142,400 1,668,800 Selling and administrative expenses: Variable selling and administrative expenses $258,700 Fixed selling and administrative expenses 100,100 358,800 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 Sales $ 1,875,000 Cost of goods sold 1,303,750 Gross profit $ 571,250 Selling and administrative expenses 358,800 Income from operations $ 212,450 b. Prepare an income statement according to the variable costing concept. Shawnee Motors Inc. Variable Costing Income Statement For the Month Ended August 31 Sales $ 1,875,000 Variable cost of goods sold Manufacturing margin $ Variable selling and administrative expenses 258,700 Contribution margin $ Fixed costs: Fixed factory overhead $ 142,400 Fixed selling and administrative expenses 100,100 Total fixed costs 242,500 Income from operations $ c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)? 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

Answer 1

Shawnee Motors Inc.
Absorption Costing Income Statement
For the Month Ended August 31
Sales	1875000
Cost of goods sold (12500 x $104.3)	1303750
Gross profit	571250
Selling and administrative expenses-Variable+Fixed	358800
Income from operations	212450
Working:
Unit product cost:
Direct materials ($888000/16000)	55.5
Direct labor ($425600/16000)	26.6
Variable factory overhead ($212800/16000)	13.3
Fixed factory overhead ($142400/16000)	8.9
Unit product cost $	104.3
b.
Shawnee Motors Inc.
Variable Costing Income Statement
For the Month Ended August 31
Sales		1875000
Variable cost of goods sold (12500 x $95.4)		1192500
Manufacturing margin		682500
Variable selling and administrative expenses		258700
Contribution margin		423800
Fixed costs:
Fixed factory overhead	142400
Fixed selling and administrative expenses	100100
Total fixed costs		242500
Income from operations		181300
Working:
Unit product cost:
Direct materials ($888000/16000)	55.5
Direct labor ($425600/16000)	26.6
Variable factory overhead ($212800/16000)	13.3
Unit product cost $	95.4
c
The difference is due the part of the fixed manufacturing cost related to ending inventory
Variable	181300
Add:(16000-12500)*8.9	31150
As per absorption costing	212450
Under Absorption costing the fixed manufacturing cost included in 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 income statement will have a higher income from operations than will
the variable costing income statement