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Income Statements under Absorption and Variable Costing Shawnee Motors Inc. assembles and sells MP3 players. The...

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.

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Expert Solution

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


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