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 (18,000 units)				$2,880,000
Production costs (23,000 units):
Direct materials		$1,361,600
Direct labor		653,200
Variable factory overhead		326,600
Fixed factory overhead		218,500		2,559,900
Selling and administrative expenses:
Variable selling and administrative expenses		$396,800
Fixed selling and administrative expenses		153,600		550,400

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
Sales	$
Cost of goods sold
Gross profit	$
Selling and administrative expenses
Income from operations	$

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		$
Variable cost of goods sold
Manufacturing margin		$
Variable selling and administrative expenses
Contribution margin		$
Fixed costs:
Fixed factory overhead	$
Fixed selling and administrative expenses
Total fixed costs
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

Unit product cost:
Absorption Costing	111.30	=2559900/23000
Variable Costing	101.80	=(2559900-218500)/23000
a
Shawnee Motors Inc.
Absorption Costing Income Statement
For the Month Ended August 31
Sales	2880000
Cost of goods sold	2003400		=18000*111.3
Gross profit	876600
Selling and administrative expenses	550400
Income from operations	326200
b
Shawnee Motors Inc.
Variable Costing Income Statement
For the Month Ended August 31
Sales		2880000
Variable cost of goods sold		1832400	=18000*101.8
Manufacturing margin		1047600
Variable selling and administrative expenses		396800
Contribution margin		650800
Fixed costs:
Fixed factory overhead	218500
Fixed selling and administrative expenses	153600
Total fixed costs		372100
Income from operations		278700
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.