Income Statements under Absorption and Variable Costing Shawnee Motors Inc. asse
ID: 2432546 • Letter: I
Question
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:
If required, round interim per-unit calculations to the nearest cent.
a. Prepare an income statement according to the absorption costing concept.
b. Prepare an income statement according to the variable costing concept.
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.
Check My Work
Sales (19,500 units) $2,535,000 Production costs (25,000 units): Direct materials $1,202,500 Direct labor 577,500 Variable factory overhead 287,500 Fixed factory overhead 192,500 2,260,000 Selling and administrative expenses: Variable selling and administrative expenses $350,300 Fixed selling and administrative expenses 135,600 485,900Explanation / Answer
Reconciliation:
Note: Selling expenses and administrative expenses both fixed and variable portions are considered period costs (expensed in the period incurred) under both absorption costing and variable costing.
Fixed manufacturing overhead under absorption costing = 192500 * 19500/25000 = 150,150
Absorption costing income statement: Particulars Amount Sales $ 25,35,000 Minus: Cost of goods sold: Direct materials $ 12,02,500 Direct labor $ 5,77,500 Variable manufacturing overhead $ 2,87,500 Fixed manufacturing overhead $ 1,50,150 Total cost of goods sold $ 22,17,650 Gross profit $ 3,17,350 Minus: Selling and administrative expenses: Variable selling and administrative $ 3,50,300 Fixed selling and administrative $ 1,35,600 Total selling and administrative expenses $ 4,85,900 Net operating income $ -1,68,550