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 (15,500 units)				$2,480,000
Production costs (20,000 units):
Direct materials		$1,184,000
Direct labor		568,000
Variable factory overhead		284,000
Fixed factory overhead		190,000		2,226,000
Selling and administrative expenses:
Variable selling and administrative expenses		$345,000
Fixed selling and administrative expenses		133,600		478,600

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

a
	Shawnee Motors Inc.
	Absorption Costing Income Statement
	For the Month Ended August 31
Sales	2480000
Cost of goods sold	1725150		=2226000/20000*15500
Gross Profit	754850
Selling and administrative expenses	478600
Income from operations	276250
b	Shawnee Motors Inc.
	Variable Costing Income Statement
	For the Month Ended August 31
Sales		2480000
Variable Cost of goods sold		1577900	=(2226000-190000)/20000*15500
Manufacturing margin		902100
Variable selling and administrative expenses		345000
Contribution margin		557100
Fixed expenses:
Fixed factory overhead	190000
Fixed selling and administrative expenses	133600	323600
Income from operations		233500
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.