Question

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 (9,000 units)				$990,000
Production costs (12,000 units):
Direct materials		$488,400
Direct labor		234,000
Variable factory overhead		117,600
Fixed factory overhead		78,000		918,000
Selling and administrative expenses:
Variable selling and administrative expenses		$142,300
Fixed selling and administrative expenses		55,100		197,400

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)-

Shawnee Motors Inc.
Contribution Margin statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)	9000 units*$110 per unit		990000
Less:- Variable cost of goods sold (b)
Opening inventory
Add:- Variable cost of goods manufatured		840000
Direct materials		488400
Direct labor		234000
Variable manufacturing overhead		117600
Fixed manufacturing overhead		78000
Variable cost of goods available for sale		918000
Less:- Closing inventory	3000 units*$76.50 per unit	229500	688500
Gross contribution margin C= a-b			301500
Less:-Variable selling & administrative exp.			142300
Contribution margin			159200
Less:- Fixed costs
Selling & administrative exp.			142300
Net Income			16900

b)-

Shawnee Motors Inc.
Contribution Margin statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	9000 units*$110 per unit		990000
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufatured		840000
Direct materials		488400
Direct labor		234000
Variable manufacturing overhead		117600
Variable cost of goods available for sale		840000
Less:- Closing inventory	3000 units*$70 per unit	210000	630000
Gross contribution margin C= a-b			360000
Less:-Variable selling & administrative exp.			142300
Contribution margin			217700
Less:- Fixed costs
Manufacturing overhead			78000
Selling & administrative exp.			142300
Net Income			-2600

c)-

Reconcilation between net operating income under variable & absorption costing method
Particulars		Amount
		$
Net income under variable costing method		-2600
Less:-Fixed manufacturing overheads brought in (opening inventories)	Nil	0
Add:-Fixed manufacturing overheads carried forword in(closing inventories)	3000 units*$6.50 per unit	19500
Net income under absorption costing method		16900

Explanation:-

Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$840000/12000 units = $70 per unit

Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + Fixed manufacturing overhead

=$918000/12000 units = $76.50 per unit