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 (13,000 units)				$1,560,000
Production costs (17,000 units):
Direct materials		$754,800
Direct labor		362,100
Variable factory overhead		181,900
Fixed factory overhead		120,700		1,419,500
Selling and administrative expenses:
Variable selling and administrative expenses		$220,000
Fixed selling and administrative expenses		85,200		305,200

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
	$
	$
	$

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.