Income Statements under Absorption and Variable Costing Shawnee Motors Inc. asse
ID: 2510795 • 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.
Sales (9,000 units) $810,000 Production costs (12,000 units): Direct materials $399,600 Direct labor 192,000 Variable factory overhead 96,000 Fixed factory overhead 63,600 751,200 Selling and administrative expenses: Variable selling and administrative expenses $116,400 Fixed selling and administrative expenses 45,100 161,500Explanation / Answer
A) unit product cost under Absorption Costing $ Direct materials (399600/12000) 33.3 Direct labor (192000/12000) 16 Variable factory overhead (96000/12000) 8 fixed factory overhead (21600/2,400) (63600/12000) 5.3 unit product cost under Absorption costing 62.6 Income statement under Absorption costing Sales 810,000 less cost of good sold (9000*62.60) 563400 Gross profit 246,600 less:Selling & adm expense 161,500 Net income 85,100 B) unit product cost under variable costing $ Direct materials (399600/12000) 33.3 Direct labor (192000/12000) 16 Variable factory overhead (96000/12000) 8 unit product cost 57.3 income statement under Variable costing Sales 810,000 less Variable expense variable cost of goods sold (9000*57.30) 515700 Variable selling & administrative expense 116,400 Contribution margin 177,900 Fixed expense fixed manufacturing overhead 63,600 fixed selling & adm expense 45,100 108,700 net income 69,200