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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 (9,500 units) $1,330,000 Production costs (12,000 units): Direct materials $621,600 Direct labor 298,800 Variable factory overhead 148,800 Fixed factory overhead 99,600 1,168,800 Selling and administrative expenses: Variable selling and administrative expenses $181,200 Fixed selling and administrative expenses 70,100 251,300 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 c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)? Under the variable costing 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