Income Statements under Absorption and Variable Costing

Shawnee Motors Inc. assembles and sells MP$3$ 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 units$)$

$$2,170,000$

Production costs units$)$:

Direct materials

Direct labor

Variable factory overhead

Fixed factory overhead

Selling and administrative expenses:

Variable selling and administrative expenses

Fixed selling and administrative expenses

$$1,036,000$

$498,000$

$248,000$

$166,000,1,948,000$

$$301,900$

$116,900$

$418,800$

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 $31$

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.