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 (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
Sales	$
Cost of goods sold
Gross profit	$
Selling and administrative expenses
Income from operations	$

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

Shawnee Motors Inc.
Variable Costing Income Statement
For the Month Ended August 31
Sales		$
Variable cost of goods sold
Manufacturing margin		$
Variable selling and administrative expenses
Contribution margin		$
Fixed costs:
Fixed factory overhead	$
Fixed selling and administrative expenses
Total fixed costs
Income from operations		$

Answer 1

a.	Absorbtion Costing Income Statement
	Sales (19,500 units)		$ 25,35,000
	Cost of Goods Sold		$ 17,62,800
	Gross Margin		$   7,72,200
	Selling and Administrative expenses ($350300 + 135600)		$   4,85,900
	Net Operating Income		$   2,86,300
	Under Absorption Costing
	Unit product cost:
	Direct Material ($12,02,500 / 25,000units)		$         48.10
	Direct Labour ($5,77,500 / 25,000 units)		$         23.10
	Varialble Manufaturing overhead ($2,87,500 / 25,000 units)		$         11.50
	Total Variable Cost		$         82.70
	Fixed factoryoverhead ($1,92,500 / 25,000 units)		$            7.70
	Unit product cost		$         90.40
	Cost of Goods Sold
	Beginning Inventory	0
	Cost of Goods manufactured (25,000 X $90.40)	$   22,60,000
	Goods available for sale	$   22,60,000
	Ending Inventory (5,500 X $90.40)	$     4,97,200
	Cost of Goods Sold	$   17,62,800
b.	Variable Costing Income Statement
	Sales (19,500 units)		$ 25,35,000
	Variable Cost of goods sold:		$ 16,12,650
	Manufacturing margin		$   9,22,350
	Variable selling expenses and administrative expense		$   3,50,300
	Contribution margin		$   5,72,050
	Fixed Expenses:
	Fixed factory overhead	$     1,92,500
	Fixed Selling and Administrative expenses	$     1,35,600	$   3,28,100
	Net operating Income		$   2,43,950
	Under Variable Costing
	Unit product cost:
	Direct Material ($12,02,500 / 25,000units)		$         48.10
	Direct Labour ($5,77,500 / 25,000 units)		$         23.10
	Varialble Manufaturing overhead ($2,87,500 / 25,000 units)		$         11.50
	Unit product cost		$         82.70
	Variable Cost of goods sold:
	Beginning Inventory	0
Add:	Variable Manufacturing Cost (25,000 X $82.70)	$   20,67,500
	Goods available for sale	$   20,67,500
Less:	Ending Inventory (5,500 X $82.70)	$     4,54,850
	Variable Cost of goods sold	$   16,12,650