Question

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 (20,000 units)				$2,000,000
Production costs (26,000 units):
Direct materials		$962,000
Direct labor		462,800
Variable factory overhead		231,400
Fixed factory overhead		153,400		1,809,600
Selling and administrative expenses:
Variable selling and administrative expenses		$280,500
Fixed selling and administrative expenses		108,600		389,100

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

Shawnee Motors Inc.
Absorption Costing Income Statement
For the Month Ended August 31
Sales	2000000
Cost of goods sold	1392000		=1809600/26000*20000
Gross profit	608000
Selling and administrative expenses	389100
Income from operations	218900
b
Shawnee Motors Inc.
Variable Costing Income Statement
For the Month Ended August 31
Sales		2000000
Variable cost of goods sold		1274000	=(1809600-153400)/26000*20000
Manufacturing margin		726000
Variable selling and administrative expenses		280500
Contribution margin		445500
Fixed costs:
Fixed factory overhead	153400
Fixed selling and administrative expenses	108600
Total fixed costs		262000
Income from operations		183500
c
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.