Income Statements under Absorption and Variable Costing Shawnee Motors Inc. assembles and sells snownmobile engines. 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 (2,000 units) $600,000 Production costs (2,400 units): Direct materials $300,000 Direct labor 115,200 Variable factory overhead 43,200 Fixed factory overhead 21,600 480,000 Selling and administrative expenses: Variable selling and administrative expenses $50,000 Fixed selling and administrative expenses 22,000 72,000 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 Sales Cost of goods sold Gross profit Selling and administrative expenses Income from operations Foodback 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 y Fixed costs: Fixed factory overhead Fixed selling and administrative expenses Variable selling and administrative expenses Contribution margin Fixed costs: Fixed factory overhead Fixed selling and administrative expenses Total fixed costs Income from operations Feedback 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 income statement will have a higher income from of inventory change. Thus, when inventory increases, the absorption costing operations than will the variable costing income statement