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 (13,000 units)				$1,560,000
Production costs (17,000 units):
Direct materials		$754,800
Direct labor		362,100
Variable factory overhead		181,900
Fixed factory overhead		120,700		1,419,500
Selling and administrative expenses:
Variable selling and administrative expenses		$220,000
Fixed selling and administrative expenses		85,200		305,200

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

• All working forms part of the answer
• Calculation of Cost of Goods Sold for 13000 sold units

Direct materials	$             7,54,800.00
Direct labor	$             3,62,100.00
Variable factory overhead	$             1,81,900.00
Fixed factory overhead	$             1,20,700.00
Total Manufacturing cost	$          14,19,500.00
Total Units produced	$                17,000.00
Unit manufacturing cost	$                         83.50
Units Sold	13000
Cost of Goods Sold	$          10,85,500.00 [13,000 x $83.5]

• Calculation of Variable manufacturing cost per unit: Total cost divided by 17000 units produced---

Direct materials	$                           44.40
Direct labor	$                           21.30
Variable factory overhead	$                           10.70
Total Variable Manufacturing cost per unit	$                           76.40

• Requirement 1

Shawnee Motors Inc.
Absorption Costing Income Statement
For the Month Ended August 31
Sales	$                                   15,60,000.00
Cost of Goods Sold	$                                   10,85,500.00 [calculated above]
Gross Profits	$                                     4,74,500.00
Selling & Administrative expenses	$                                     3,05,200.00
Net Income	$                                     1,69,300.00

• Requirement 2

Shawnee Motors Inc.
Variable Costing Income Statement
For the Month Ended August 31
Sales		$    15,60,000.00
Variable manufacturing cost	$             9,93,200.00 [13000 x 76.4]
Variable selling & administrative expense	$             2,20,000.00
Total Variable cost		$    12,13,200.00
Contribution Margin		$       3,46,800.00
Fixed costs:
Fixed factory overhead	$             1,20,700.00
Fixed selling and administrative expenses	$                 85,200.00
Total Fixed Overhead		$       2,05,900.00
Net Income		$       1,40,900.00

• Requirement 3

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.