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 (13,500 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

Answer 1

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.