Question

1. 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 (13,000 units)				$2,080,000
   Production costs (17,000 units):
   Direct materials		$1,006,400
   Direct labor		482,800
   Variable factory overhead		241,400
   Fixed factory overhead		161,500		1,892,100
   Selling and administrative expenses:
   Variable selling and administrative expenses		$293,300
   Fixed selling and administrative expenses		113,500		406,800

   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.

Check My Work

Answer 1

Solution 1:

Shawnee Motors Inc.
Income Statement (Absorption Costing)
For the Month ended August 31
Sales	$20,80,000
Less: Cost Of Goods sold [$1892100/17000*13000]	$14,46,900
Gross Profit	$6,33,100
Less: Selling and administrative Expenses	$4,06,800
Income from Operation	$2,26,300

Solution 2:

Shawnee Motors Inc.
Income Statement (Variable Costing)
For the month ended August 31
Sales		$20,80,000
Variable Cost of Goods sold [($1006400+$482800+$241400)/17000*13000]		$13,23,400
Manufacturing Margin		$7,56,600
Variable Selling and administrative Expenses		$2,93,300
Contribution margin		$4,63,300
Less: Fixed Expenses
Fixed Factory Overhead	$1,61,500
Fixed Selling and administrative expenses	$1,13,500
Total Fixed costs		$2,75,000
Income from Operation		$1,88,300

Solution 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 income statement will have a higher income from operations than will the variable costing income statement.