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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 (13,500 units) $1,890,000
Production costs (17,000 units):
Direct materials $880,600
Direct labor 423,300
Variable factory overhead 210,800
Fixed factory overhead 141,100 1,655,800
Selling and administrative expenses:
Variable selling and administrative expenses $256,600
Fixed selling and administrative expenses 99,300 355,900

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

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Expert Solution

Shawnee Motors Inc.
Absorption Costing Income Statement
For the Month Ended August 31
Sales 1890000
Cost of goods sold 1314900 =1655800/17000*13500
Gross profit 575100
Selling and administrative expenses 355900
Income from operations 219200
2
Shawnee Motors Inc.
Variable Costing Income Statement
For the Month Ended August 31
Sales 1890000
Variable cost of goods sold 1202850 =(1655800-141100)/17000*13500
Manufacturing margin 687150
Variable selling and administrative expenses 256600
Contribution margin 430550
Fixed costs:
Fixed factory overhead 141100
Fixed selling and administrative expenses 99300
Total fixed costs 240400
Income from operations 190150
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.

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