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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 (17,500 units)				$2,100,000
Production costs (23,000 units):
Direct materials		$1,021,200
Direct labor		489,900
Variable factory overhead		246,100
Fixed factory overhead		163,300		1,920,500
Selling and administrative expenses:
Variable selling and administrative expenses		$297,700
Fixed selling and administrative expenses		115,200		412,900

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
	$_________ (cost of goods, direct labor,direct materials,fixed factory overhead, and sales) ***Pick one for each***
	$_________
	$_________

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

Shawnee Motors Inc.
Variable Costing Income Statement
For the Month Ended August 31
		$________ (cost of goods, direct labor,direct materials,fixed factory overhead, and sales) ***Pick one for each***
		$________
		$________
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 cost/Varible cost?) method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under (Absorption cost/Variable cost?) , 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 cost/Variable cost?) income statement will have a higher income from operations than will the variable costing income statement.

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