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 (10,000 units)				$1,400,000
Production costs (13,000 units):
Direct materials		$673,400
Direct labor		323,700
Variable factory overhead		161,200
Fixed factory overhead		107,900		1,266,200
Selling and administrative expenses:
Variable selling and administrative expenses		$196,300
Fixed selling and administrative expenses		76,000		272,300

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	$fill in the blank ed74c5fe2fdffc7_2
Cost of goods sold	fill in the blank ed74c5fe2fdffc7_4
	$fill in the blank ed74c5fe2fdffc7_6
	fill in the blank ed74c5fe2fdffc7_8
	$fill in the blank ed74c5fe2fdffc7_10

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a. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead.

Learning Objective 1.

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

Shawnee Motors Inc.
Variable Costing Income Statement
For the Month Ended August 31
		$fill in the blank 5fb934fdcfe7007_2
		fill in the blank 5fb934fdcfe7007_4
		$fill in the blank 5fb934fdcfe7007_6
		fill in the blank 5fb934fdcfe7007_8
		$fill in the blank 5fb934fdcfe7007_10
Fixed costs:
	$fill in the blank 5fb934fdcfe7007_12
	fill in the blank 5fb934fdcfe7007_14
		fill in the blank 5fb934fdcfe7007_16
		$fill in the blank 5fb934fdcfe7007_18

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b. Under variable costing, the cost of goods manufactured includes only variable manufacturing costs.

Learning Objective 1.

c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?

Under the absorption costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under variable costing , 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 costing income statement will have a higher income from operations than will the variable costing income statement.