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 (17,500 units)$1,575,000Production costs (23,000 units):Direct materials$765,900Direct labor368,000Variable factory overhead184,000Fixed factory overhead121,9001,439,800Selling and administrative expenses:Variable selling and administrative expenses$223,200Fixed selling and administrative expenses86,400309,600

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 StatementFor the Month Ended August 31Sales

$Cost of goods sold

Gross profit

$Selling and administrative expenses

Income from operations

$

Feedback

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 StatementFor the Month Ended August 31Sales

$Variable cost of goods sold

Manufacturing margin

$Variable selling and administrative expenses

Contribution margin

$Fixed costs:Fixed factory overhead

$Fixed selling and administrative expenses

Total fixed costs

Income from operations

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 theabsorption costing

method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Undervariable costing

, 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, theabsorption costing

income statement will have a higher income from operations than will the variable costing income statement.