Question
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
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 (17,500 units) | $2,100,000 | ||||
Production costs (23,000 units): | |||||
Direct materials | $1,021,200 | ||||
Direct labor | 489,900 | ||||
Variable factory overhead | 246,100 | ||||
Fixed factory overhead | 163,300 | 1,920,500 | |||
Selling and administrative expenses: | |||||
Variable selling and administrative expenses | $297,700 | ||||
Fixed selling and administrative expenses | 115,200 | 412,900 |
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, direct labor,direct materials,fixed factory overhead, and sales) ***Pick one for each*** | |
$_________ | |
$_________ |
b. Prepare an income statement according to the variable costing concept.
Shawnee Motors Inc. | ||
Variable Costing Income Statement | ||
For the Month Ended August 31 | ||
$________ (cost of goods, direct labor,direct materials,fixed factory overhead, and sales) ***Pick one for each*** | ||
$________ | ||
$________ | ||
Fixed costs: | ||
$_________ | ||
$___________ |
c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?
Under the (Absorption cost/Varible cost?) method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under (Absorption cost/Variable cost?) , 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 cost/Variable cost?) income statement will have a higher income from operations than will the variable costing income statement.
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