Question

Income Statements under The reporting of the costs of manufactured products, normally direct materials, direct labor, and factory overhead, as product costs.Absorption and The concept that considers the cost of products manufactured to be composed only of those manufacturing costs that increase or decrease as the volume of production rises or falls (direct materials, direct labor, and variable factory overhead).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 (13,500 units)				$1,755,000
Production costs (17,000 units):
Direct materials		$817,700
Direct labor		392,700
Variable factory overhead		195,500
Fixed factory overhead		130,900		1,536,800
Selling and administrative expenses:
Variable selling and administrative expenses		$238,200
Fixed selling and administrative expenses		92,200		330,400

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
< role="button" >Cost of goods soldDirect laborDirect materialsFixed factory overheadSales	$
< role="button" >Cost of goods soldGross profitSalesSelling and administrative expensesVariable factory overhead
< role="button" >Direct laborDirect materialsGross profitFixed factory overheadSales	$
< role="button" >Cost of goods soldFixed factory overheadSalesSelling and administrative expensesVariable factory overhead
< role="button" >Income from operationsLoss from operations	$

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

Shawnee Motors Inc.
Variable Costing Income Statement
For the Month Ended August 31
< role="button" >Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expenses		$
< role="button" >Fixed factory overheadFixed selling and administrative expensesManufacturing marginVariable cost of goods soldVariable selling and administrative expenses
< role="button" >Contribution marginManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expenses		$
< role="button" >Fixed factory overheadFixed selling and administrative expensesManufacturing marginVariable cost of goods soldVariable selling and administrative expenses
< role="button" >Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expenses		$
Fixed costs:
< role="button" >Contribution marginFixed factory overheadManufacturing marginSalesVariable cost of goods sold	$
< role="button" >Fixed selling and administrative expensesManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expenses
< role="button" >Contribution marginIncome from operationsManufacturing marginSalesTotal fixed costs
< role="button" >Income from operationsLoss from operations		$

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c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?

Under the

absorption costing

variable costing

method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under < role="button" >absorption costing

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 < role="button" >absorption costing

variable costing

income statement will have a higher income from operations than will the variable costing income statement

Answer 1

a
Shawnee Motors Inc.
Absorption Costing Income Statement
For the Month Ended August 31
Sales	1755000
Cost of goods sold	1220400		=13500*90.4
Gross profit	534600
Selling and administrative expenses	330400
Income from operations	204200
b
Shawnee Motors Inc.
Variable Costing Income Statement
For the Month Ended August 31
Sales		1755000
Variable cost of goods sold		1116450	=13500*82.7
Manufacturing margin		638550
Variable selling and administrative expenses		238200
Contribution margin		400350
Fixed costs:
Fixed factory overhead	130900
Fixed selling and administrative expenses	92200
Total fixed costs		223100
Income from operations		177250
c
Under the absorption costing 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, absorption costing income statement will have a higher income from operations than will the variable costing income statement
Calculations:
Unit Product cost:
Absorption costing = 1536800/17000= $90.4
Variable costing = (1536800-130900)/17000= $82.7