In: Accounting
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 (19,500 units) | $2,535,000 | ||||
Production costs (25,000 units): | |||||
Direct materials | $1,202,500 | ||||
Direct labor | 577,500 | ||||
Variable factory overhead | 287,500 | ||||
Fixed factory overhead | 192,500 | 2,260,000 | |||
Selling and administrative expenses: | |||||
Variable selling and administrative expenses | $350,300 | ||||
Fixed selling and administrative expenses | 135,600 | 485,900 |
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 | |
$ | |
$ | |
$ |
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.
Check My Work
Absorption costing income statement: | |||
Particulars | Amount | ||
Sales | $ 25,35,000 | ||
Minus: | |||
Cost of goods sold: | |||
Direct materials | $ 12,02,500 | ||
Direct labor | $ 5,77,500 | ||
Variable manufacturing overhead | $ 2,87,500 | ||
Fixed manufacturing overhead | $ 1,50,150 | ||
Total cost of goods sold | $ 22,17,650 | ||
Gross profit | $ 3,17,350 | ||
Minus: | |||
Selling and administrative expenses: | |||
Variable selling and administrative | $ 3,50,300 | ||
Fixed selling and administrative | $ 1,35,600 | ||
Total selling and administrative expenses | $ 4,85,900 | ||
Net operating income | $ -1,68,550 |
Variable costing income statement | |||
Particulars | Amount | ||
Sales | $ 25,35,000 | ||
Minus: | |||
Variable costs | |||
Direct materials | $ 12,02,500 | ||
Direct labor | $ 5,77,500 | ||
Variable manufacturing overhead | $ 2,87,500 | ||
Variable selling and administrative expenses | $ 3,50,300 | ||
Total variable costs | $ 24,17,800 | ||
Contribution | $ 1,17,200 | ||
Minus: | |||
Fixed costs: | |||
Fixed manufacturing overhead | $ 1,92,500 | ||
Fixed selling and administrative expenses | $ 1,35,600 | ||
Total fixed costs | $ 3,28,100 | ||
Net operating income | $ -2,10,900 |
Reconciliation:
Particulars | Amount |
Net operating income under absorption costing | $ -1,68,550 |
Less | |
Fixed manufacturing overhead capitalized as part of closing inventory under absorption costing | $ 42,350 |
Net operating income under variable costing | $ -2,10,900 |
Note: Selling expenses and administrative expenses both fixed and variable portions are considered period costs (expensed in the period incurred) under both absorption costing and variable costing.
Fixed manufacturing overhead under absorption costing = 192500 * 19500/25000 = 150,150