Income Statements under Absorption and Variable Costing Shawnee Motors Inc. asse
ID: 2561364 • 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 (10,000 units) $1,300,000 Production costs (13,000 units): Direct materials $625,300 Direct labor 300,300 Variable factory overhead 149,500 Fixed factory overhead 100,100 1,175,200 Selling and administrative expenses: Variable selling and administrative expenses $182,200 Fixed selling and administrative expenses 70,500 252,700Explanation / Answer
a. Shawnee Motors Inc.
Absorption Costing Income Statement
For the month ended August 31
b. Shawnee Motors Inc.
Variable Costing Income Statement
For the month ending August 31
c. Under the absorption costing method, the fixed manufacturing overhead included in the cost of goods sold is matched with the revenues. Under variable costing method, 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 absorption costing income statement will have a higher income from operations than will the variable costing income statement.
$ $ Sales ( 10,000 units) 1,300,000 Cost of Goods Sold Cost of Goods Available for Sale 1,175,200 Ending Inventory (271,200) 904,000 Gross Profit 396,000 Selling and Administrative Expenses Variable 182,200 Fixed 70,500 252,700 Net Operating Income 143,300