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 (9,000 units)				$810,000
Production costs (12,000 units):
Direct materials		$399,600
Direct labor		192,000
Variable factory overhead		96,000
Fixed factory overhead		63,600		751,200
Selling and administrative expenses:
Variable selling and administrative expenses		$116,400
Fixed selling and administrative expenses		45,100		161,500

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

A)	unit product cost under Absorption Costing
					$
	Direct materials		(399600/12000)		33.3
	Direct labor		(192000/12000)		16
	Variable factory overhead		(96000/12000)		8
	fixed factory overhead (21600/2,400)		(63600/12000)		5.3
	unit product cost under Absorption costing				62.6
			Income statement under Absorption costing
	Sales						810,000
	less cost of good sold			(9000*62.60)			563400
	Gross profit						246,600
	less:Selling & adm expense						161,500
	Net income						85,100
B)	unit product cost under variable costing
					$
	Direct materials		(399600/12000)		33.3
	Direct labor		(192000/12000)		16
	Variable factory overhead		(96000/12000)		8
	unit product cost				57.3
		income statement under Variable costing
	Sales						810,000
	less Variable expense
	variable cost of goods sold			(9000*57.30)			515700
	Variable selling & administrative expense						116,400
	Contribution margin						177,900
	Fixed expense
	fixed manufacturing overhead				63,600
	fixed selling & adm expense				45,100		108,700
	net income						69,200