4. 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)				$1,300,000
   Production costs (17,000 units):
   Direct materials		$629,000
   Direct labor		302,600
   Variable factory overhead		151,300
   Fixed factory overhead		100,300		1,183,200
   Selling and administrative expenses:
   Variable selling and administrative expenses		$183,400
   Fixed selling and administrative expenses		71,000		254,400

   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.