Income Statements underAbsorptionandVariable Costing

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 or August: Sales (10,000 units) $1,200,000 Production costs (13,000 units): Direct materials $577,200 ect labor 276,900 Variable factory overhead 139,100 Fixed factory overhead 92,300 1,085,500 Selling and administrative expenses: Variable selling and administrative expenses $168,300 Fixed selling and administrative expenses 65,100 233,400 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 Sales v Cost of goods sold v Gross profit v Selling and administrative expenses Income from operations v Feedback Check My Work a. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead. Learning Objective 1.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 v $ Variable cost of goods sold v Manufacturing margin v Variable selling and administrative expenses v Contribution margin v Fixed costs: Fixed factory overhead v Fixed selling and administrative expenses v Total fixed costs v Income from operations Feedback Check My Work b. Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. Learning Objective 1. c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)? Under the absorption costing v method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under variable costing v , 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 costing v income statement will have a higher income from operations than will the variable costing income statement. Feedback Check My Work Correct Check My Work Previous Next