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 (12,500 units)				$1,125,000
Production costs (16,000 units):
Direct materials		$532,800
Direct labor		256,000
Variable factory overhead		128,000
Fixed factory overhead		84,800		1,001,600
Selling and administrative expenses:
Variable selling and administrative expenses		$155,200
Fixed selling and administrative expenses		60,100		215,300

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	________
Cost of goods sold	________
Gross profit	________
Selling and administrative expenses	________
Income from operations	________

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		_______
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		_______

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.