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 (14,000 units)				$1,960,000
Production costs (18,000 units):
Direct materials		$932,400
Direct labor		448,200
Variable factory overhead		223,200
Fixed factory overhead		149,400		1,753,200
Selling and administrative expenses:
Variable selling and administrative expenses		$271,700
Fixed selling and administrative expenses		105,200		376,900

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 (absorption or variable ) method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under (absorption or variable), 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 or variable) 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	1960000
Cost of goods sold	1363600		=1753200/18000*14000
Gross profit	596400
Selling and administrative expenses	376900
Income from operations	219500
2
Shawnee Motors Inc.
Variable Costing Income Statement
For the Month Ended August 31
Sales		1960000
Variable cost of goods sold		1247400	=(1753200-149400)/18000*14000
Manufacturing margin		712600
Variable selling and administrative expenses		271700
Contribution margin		440900
Fixed costs:
Fixed factory overhead	149400
Fixed selling and administrative expenses	105200
Total fixed costs		254600
Income from operations		186300
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 costing income statement will have a higher income from operations than will the variable costing income statement.