Income Statements under Absorption and Variable Costing Shawnee Motors Inc. asse
ID: 2606018 • Letter: I
Question
Income Statements under Absorption and Variable Costing Shawnee Motors Inc. assembl“ and sells MP3 players. The company began operations on August 1 and operated at 100% of capacity during the irst month. The follow ng data summ anze the results for August Sales (13,500 units) Production costs (17,000 units) 1,350,000 Direct materials Direct labor Variable factory overhead Fixed factory overhead $629,000 302,600 100,300 1,183,200 Selling and administrative expensesi Variable selling and administrative expenses $183,400 selling and a if required, round interim per-unit calculations to the nearest cent. Shawnee Motors Inc. Absorption Costing Income Statement For the Month Ended August 31Explanation / Answer
Answer
Sales Revenue (given)
1350000
Less: Manufacturing Cost
[1183200 x 13500/17000] 939600
Gross Profit
410400
Selling Expenses (given)
254400
Net Income
156000
Sales (given)
1350000
Less: variable cost
Direct material [629000 x 13500/17000]
499500
Direct Labor [302600 x 13500/17000]
240300
Variable factory overhead [151300 x 13500/17000]
120150
Variable selling & administrative overhead (given) [183400 x 13500/13500]
183400
Total Variable Cost
1043350
Contribution Margin
306650
Less: Fixed Cost
Fixed factory overhead
100300
Fixed selling & administrative expenses
71000
Total Fixed Cost
171300
Net Income
135350
Under the Absorption Costing method the fixed manufacturing cost included in the cost of goods is matched with the revenues. Under Variable costing, all of the manufacturing overhead cost is deducted in the period in which is incurred, regardless of the amount of inventory change. Thus, when inventory increases, the absorption costing income statement will have a higher income from operation than will the variable costing income statement.
Sales Revenue (given)
1350000
Less: Manufacturing Cost
[1183200 x 13500/17000] 939600
Gross Profit
410400
Selling Expenses (given)
254400
Net Income
156000