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 (15,500 units)				$1,395,000
Production costs (20,000 units):
Direct materials		$666,000
Direct labor		320,000
Variable factory overhead		160,000
Fixed factory overhead		106,000		1,252,000
Selling and administrative expenses:
Variable selling and administrative expenses		$194,100
Fixed selling and administrative expenses		75,100		269,200

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
Sales	$
Cost of goods sold
Gross profit	$
Selling and administrative expenses
Income from operations	$

b. Prepare an income statement according to the variable costing concept.

Shawnee Motors Inc.
Variable Costing Income Statement
For the Month Ended August 31
Sales		$
Variable cost of goods sold
Manufacturing margin		$
Variable selling and administrative expenses
Contribution margin		$
Fixed costs:
Fixed factory overhead	$
Fixed selling and administrative expenses
Total fixed costs
Income from operations		$

Answer 1

a.

Shawnee Motors Inc.
Absorption Costing Income Statement
For the Month Ended August 31
Sales	1395000
Cost of goods sold (15500 x $62.60)	970300
Gross profit	424700
Selling and administrative expenses	269200
Income from operations	155500

Working:

Unit product cost:
Direct materials ($666000/20000)	33.30
Direct labor ($320000/20000)	16.00
Variable factory overhead ($160000/20000)	8.00
Fixed factory overhead ($106000/20000)	5.30
Unit product cost $	62.60

b.

Shawnee Motors Inc.
Variable Costing Income Statement
For the Month Ended August 31
Sales		1395000
Variable cost of goods sold (15500 x $57.30)		888150
Manufacturing margin		506850
Variable selling and administrative expenses		194100
Contribution margin		312750
Fixed costs:
Fixed factory overhead	106000
Fixed selling and administrative expenses	75100
Total fixed costs		181100
Income from operations		131650

Working:

Unit product cost:
Direct materials ($666000/20000)	33.30
Direct labor ($320000/20000)	16.00
Variable factory overhead ($160000/20000)	8.00
Unit product cost $	57.30