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 (17,500 units)				$2,100,000
Production costs (23,000 units):
Direct materials		$1,021,200
Direct labor		489,900
Variable factory overhead		246,100
Fixed factory overhead		163,300		1,920,500
Selling and administrative expenses:
Variable selling and administrative expenses		$297,700
Fixed selling and administrative expenses		115,200		412,900

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
	$_________ (cost of goods, direct labor,direct materials,fixed factory overhead, and sales) ***Pick one for each***
	$_________
	$_________

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

Shawnee Motors Inc.
Variable Costing Income Statement
For the Month Ended August 31
		$________ (cost of goods, direct labor,direct materials,fixed factory overhead, and sales) ***Pick one for each***
		$________
		$________
Fixed costs:
	$_________
		$___________

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

Under the (Absorption cost/Varible cost?) method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under (Absorption cost/Variable cost?) , 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 cost/Variable cost?) income statement will have a higher income from operations than will the variable costing income statement.

Answer 1

A)	unit product cost under Absorption Costing
					$
	Direct materials		(1,021,200/23000)		44.4
	Direct labor		(489900/23000)		21.3
	Variable factory overhead		(246100/23000)		10.7
	fixed factory overhead (21600/2,400)		(163,300/23000)		7.1
	unit product cost under Absorption costing				83.5
			Income statement under Absorption costing
	Sales						2,100,000
	less cost of good sold			(17500*83.5)			1461250
	Gross profit						638,750
	less:Selling & adm expense						412,900
	Net income						225,850
B)	unit product cost under variable costing
					$
	Direct materials				44.4
	Direct labor				21.3
	Variable factory overhead				10.7
	unit product cost				76.4
		income statement under Variable costing
	Sales						2,100,000
	less Variable expense
	variable cost of goods sold			(17500*76.4)			1337000
	Variable selling & administrative expense						297,700
	Contribution margin						465,300
	Fixed expense
	fixed manufacturing overhead				163,300
	fixed selling & adm expense				115,200		278,500
	net income						186,800
c)	Variable
	Absorption
	Absorption