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)				$1,300,000
Production costs (13,000 units):
Direct materials		$625,300
Direct labor		300,300
Variable factory overhead		149,500
Fixed factory overhead		100,100		1,175,200
Selling and administrative expenses:
Variable selling and administrative expenses		$182,200
Fixed selling and administrative expenses		70,500		252,700

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 _______ 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.