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 (10,500 units) $1,365,000 Production costs (14,000 units): Direct materials $673,400 Direct labor 323,400 Variable factory overhead 161,000 Fixed factory overhead 107,800 1,265,600 Selling and administrative expenses: Variable selling and administrative expenses $196,200 Fixed selling and administrative expenses 75,900 272,100 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 BLANK method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under, BLANK 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 BLANK income statement will have a higher income from operations than will the variable costing income statement.