Question

Income statements under absorption and variable costing Shawnee Motors Inc. assembles and sells snowmobile engines. 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 (3,000 units) $570,000 Production costs (4,000 units): Direct materials $281,200 Direct labor 134,800 Variable factory overhead 67,600 Fixed factory overhead 44,800 528,400 Selling and administrative expenses: Variable selling and administrative expenses $81,900 Fixed selling and administrative expenses 31,700 113,600 a. Prepare an income statement according to the absorption costing concept. b. Prepare an income statement according to the variable costing concept.

Answer 1

Answer a.

Total production cost = $528,400
Units produced = 4,000

Cost per unit = Total production cost / Units produced
Cost per unit = $528,400 / 4,000
Cost per unit = $132.10

Cost of goods sold = Cost per unit * Units sold
Cost of goods sold = $132.10 * 3,000
Cost of goods sold = $396,300

Answer b.

Total variable production cost = Direct materials + Direct labor + Variable factory overhead
Total variable production cost = $281,200 + $134,800 + $67,600
Total variable production cost = $483,600

Cost per unit = Total variable production cost / Units produced
Cost per unit = $483,600 / 4,000
Cost per unit = $120.90

Variable cost of goods sold = Cost per unit * Units sold
Variable cost of goods sold = $120.90 * 3,000
Variable cost of goods sold = $362,700