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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 (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.

Solutions

Expert Solution

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

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