Income Statements underAbsorptionandVariable 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 (16,500 units)$2,640,000Production costs (21,000 units):Direct materials$1,243,200Direct labor596,400Variable factory overhead298,200Fixed factory overhead199,5002,337,300Selling and administrative expenses:Variable selling and administrative expenses$362,300Fixed selling and administrative expenses140,200502,500

If required, round interim per-unit calculations to the nearest cent.

a.Make an income statement according to the absorption costing concept.

Shawnee Motors Inc.Absorption Costing Income StatementFor the Month Ended August 31

$

$

$

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

Shawnee Motors Inc.Variable Costing Income StatementFor 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.