Question

Shawnee Motors Inc. assembles and sells snowmobile engines. 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:

1	Sales (38,000 units)		$9,500,000.00
2	Production costs (44,000 units):
3	Direct materials	$4,400,000.00
4	Direct labor	1,760,000.00
5	Variable factory overhead	1,100,000.00
6	Fixed factory overhead	660,000.00	7,920,000.00
7	Selling and administrative expenses:
8	Variable selling and administrative expenses	$1,170,000.00
9	Fixed selling and administrative expenses	200,000.00	1,370,000.00

	Required:
a.	Prepare an income statement according to the absorption costing concept.*
b.	Prepare an income statement according to the variable costing concept.*
c.	What is the reason for the difference in the amount of income from operations reported in (a) and (b)? * Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. Enter all amounts as positive numbers.

Answer 1

a)

Shawnee Motors Inc
Income Statement under Absorption costing
For the month ended August
Sales		$ 9,500,000
Less: Cost of goods sold
Direct material ($4,400,000/44,000*38,000)	$ 3,800,000
Direct labor ($1,760,000/44,000*38,000)	$ 1,520,000
Variable factory overhead ($1,100,000/44,000*38,000)	$     950,000
Fixed factory overhead ($660,000/44,000*38,000)	$     570,000
Total cost of goods sold		$ 6,840,000
Gross profit		$ 2,660,000
Less: Selling and administrative expenses
Variable selling and administrative expenses	$ 1,170,000
Fixed selling and administrative expenses	$     200,000
Total selling and administrative expenses		$ 1,370,000
Net income		$ 1,290,000

b)

Shawnee Motors Inc
Income Statement under Variable costing
For the month ended August
Sales		$ 9,500,000
Less: Variable expenses
Direct material ($4,400,000/44,000*38,000)	$ 3,800,000
Direct labor ($1,760,000/44,000*38,000)	$ 1,520,000
Variable factory overhead ($1,100,000/44,000*38,000)	$     950,000
Variable selling and administrative expenses	$ 1,170,000
Total variable expenses		$ 7,440,000
Contribution margin		$ 2,060,000
Less: Fixed expenses
Fixed factory overhead	$     660,000
Fixed selling and administrative expenses	$     200,000
Total fixed expenses		$     860,000
Net income		$ 1,200,000

c) Under absorption costing, fixed factory cost will allocated based on number of units produced. but as per variable costing entire fixed factory cost incurred during the year will expensed in same year. so it will affect the net result

You can reach me over comment box if you have any doubts. Please rate this answer