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 (18,500 units) | $2,960,000 | ||||
Production costs (24,000 units): | |||||
Direct materials | $1,420,800 | ||||
Direct labor | 681,600 | ||||
Variable factory overhead | 340,800 | ||||
Fixed factory overhead | 228,000 | 2,671,200 | |||
Selling and administrative expenses: | |||||
Variable selling and administrative expenses | $414,000 | ||||
Fixed selling and administrative expenses | 160,300 | 574,300 |
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 | $ |
Feedback
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 | $ |
Feedback
c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?
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.
Shawnee Motors Inc. |
|
Absorption Costing Income Statement |
|
For the Month Ended August 31 |
|
Sales |
$ 2,960,000.00 |
Cost of goods sold |
$ 2,059,050.00 |
Gross profit |
$ 900,950.00 |
Selling and administrative expenses |
$ 479,425.00 |
Income from operations |
$ 421,525.00 |
Cost Of Goods manufactured |
|
Material Cost |
$ 1,420,800.00 |
Direct Labor |
$ 681,600.00 |
Variable Factory Overheads |
$ 340,800.00 |
Fixed Factory Overheads |
$ 228,000.00 |
Total Cost |
$ 2,671,200.00 |
Units Produced |
24000 |
Cost Per Unit produced |
$ 111.30 |
Cost of Goods Sold |
|
Opening Stock |
$ - |
Cost of Goods manufactured |
$ 2,671,200.00 |
Less: Cost of Finished Goods |
$ 612,150.00 |
Cost of Goods Sold |
$ 2,059,050.00 |
Shawnee Motors Inc. |
||
Variable Costing Income Statement |
||
For the Month Ended August 31 |
||
Sales |
$2,960,000.00 |
|
Variable cost of goods sold |
$1,883,300.00 |
|
Manufacturing margin |
$1,076,700.00 |
|
Variable selling and administrative expenses |
$ 319,125.00 |
|
Contribution margin |
$ 757,575.00 |
|
Fixed costs: |
||
Fixed factory overhead |
$ 228,000.00 |
|
Fixed selling and administrative expenses |
$ 160,300.00 |
|
Total fixed costs |
$ 388,300.00 |
|
Income from operations |
$ 369,275.00 |