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 (19,000 units)				$2,090,000
Production costs (25,000 units):
Direct materials		$1,017,500
Direct labor		487,500
Variable factory overhead		245,000
Fixed factory overhead		162,500		1,912,500
Selling and administrative expenses:
Variable selling and administrative expenses		$296,400
Fixed selling and administrative expenses		114,800		411,200

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

Cost of goods soldDirect laborDirect materialsFixed factory overheadSalesSales	$Sales
Cost of goods soldGross profitSalesSelling and administrative expensesVariable factory overheadCost of goods sold	Cost of goods sold
Direct laborDirect materialsGross profitFixed factory overheadSales	$- Select -
Cost of goods soldFixed factory overheadSalesSelling and administrative expensesVariable factory overhead	- Select -
Income from operationsLoss from operations	$- Select -

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

Shawnee Motors Inc. Variable Costing Income Statement For the Month Ended August 31

Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expenses		$- Select -
Fixed factory overheadFixed selling and administrative expensesManufacturing marginVariable cost of goods soldVariable selling and administrative expenses		- Select -
Contribution marginManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expenses		$- Select -
Fixed factory overheadFixed selling and administrative expensesManufacturing marginVariable cost of goods soldVariable selling and administrative expenses		- Select -
Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expenses		$- Select -
Fixed costs:
Contribution marginFixed factory overheadManufacturing marginSalesVariable cost of goods sold	$- Select -
Fixed selling and administrative expensesManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expenses	- Select -
Contribution marginIncome from operationsManufacturing marginSalesTotal fixed costs		- Select -
Income from operationsLoss from operations		$- Select -

c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?Under the absorption costingvariable costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under absorption costingvariable 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 costingvariable costing income statement will have a higher income from operations than will the variable costing income statement.