Income Statements under Absorption and Variable Costing
Shawnee Motors Inc. assembles and sells MP3 players. The companybegan operations on August 1 and operated at 100% of capacityduring the first month. The following data summarize the resultsfor August:
Sales (18,500 units) $2,960,000 Production costs (24,000 units): Directmaterials $1,420,800 Directlabor 681,600 Variablefactory overhead 340,800 Fixedfactory overhead 228,000 2,671,200 Selling and administrative expenses: Variableselling and administrative expenses $414,000 Fixedselling and administrative expenses 160,300 574,300
If required, round interim per-unit calculations to the nearestcent.
a. Prepare an income statement according to theabsorption costing concept.
Shawnee Motors Inc. Absorption Costing Income Statement Forthe Month Ended August 31 Sales $ Cost of goods sold Gross profit $ Selling and administrativeexpenses Income fromoperations $
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b. Prepare an income statement according to thevariable costing concept.
Shawnee Motors Inc. Variable Costing Income Statement Forthe Month Ended August 31 Sales $ Variable cost of goodssold Manufacturing margin $ Variable selling and administrativeexpenses Contribution margin $ Fixed costs: Fixed factoryoverhead $ Fixed selling and administrativeexpenses Total fixed costs Income fromoperations $
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c. What is the reason for the difference in theamount of income from operations reported in (a) and (b)?
Under the absorption costing method, the fixedmanufacturing cost included in the cost of goods sold is matchedwith the revenues. Under variable costing , all ofthe fixed manufacturing cost is deducted in the period in which itis incurred, regardless of the amount of inventory change. Thus,when inventory increases, the absorption costingincome statement will have a higher income from operations thanwill the variable costing income statement.
Income Statements under Absorption and Variable Costing
Shawnee Motors Inc. assembles and sells MP3 players. The companybegan operations on August 1 and operated at 100% of capacityduring the first month. The following data summarize the resultsfor August:
| Sales (18,500 units) | $2,960,000 | ||||
| Production costs (24,000 units): | |||||
| Directmaterials | $1,420,800 | ||||
| Directlabor | 681,600 | ||||
| Variablefactory overhead | 340,800 | ||||
| Fixedfactory overhead | 228,000 | 2,671,200 | |||
| Selling and administrative expenses: | |||||
| Variableselling and administrative expenses | $414,000 | ||||
| Fixedselling and administrative expenses | 160,300 | 574,300 | |||
If required, round interim per-unit calculations to the nearestcent.
a. Prepare an income statement according to theabsorption costing concept.
| Shawnee Motors Inc. | |
| Absorption Costing Income Statement | |
| Forthe Month Ended August 31 | |
| Sales | $ |
| Cost of goods sold | |
| Gross profit | $ |
| Selling and administrativeexpenses | |
| Income fromoperations | $ |
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b. Prepare an income statement according to thevariable costing concept.
| Shawnee Motors Inc. | ||
| Variable Costing Income Statement | ||
| Forthe Month Ended August 31 | ||
| Sales | $ | |
| Variable cost of goodssold | ||
| Manufacturing margin | $ | |
| Variable selling and administrativeexpenses | ||
| Contribution margin | $ | |
| Fixed costs: | ||
| Fixed factoryoverhead | $ | |
| Fixed selling and administrativeexpenses | ||
| Total fixed costs | ||
| Income fromoperations | $ | |
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c. What is the reason for the difference in theamount of income from operations reported in (a) and (b)?
Under the absorption costing method, the fixedmanufacturing cost included in the cost of goods sold is matchedwith the revenues. Under variable costing , all ofthe fixed manufacturing cost is deducted in the period in which itis incurred, regardless of the amount of inventory change. Thus,when inventory increases, the absorption costingincome statement will have a higher income from operations thanwill the variable costing income statement.
Related questions
Income Statementsunder Absorption and Variable Costing
Shawnee Motors Inc.assembles and sells MP3 players. The company began operations onAugust 1 and operated at 100% of capacity during the first month.The following data summarize the results for August:
| Sales (18,500 units) | $1,850,000 | ||||
| Production costs (24,000 units): | |||||
| Directmaterials | $888,000 | ||||
| Directlabor | 427,200 | ||||
| Variablefactory overhead | 213,600 | ||||
| Fixedfactory overhead | 141,600 | 1,670,400 | |||
| Selling and administrative expenses: | |||||
| Variableselling and administrative expenses | $258,900 | ||||
| Fixedselling and administrative expenses | 100,200 | 359,100 | |||
If required, roundinterim per-unit calculations to the nearest cent.
a.Prepare an income statement according to the absorption costingconcept.
| Shawnee Motors Inc. | |
| Absorption Costing Income Statement | |
| For the Month Ended August 31 | |
| $ | |
| $ | |
| $ | |
b.Prepare an income statement according to the variable costingconcept.
| Shawnee Motors Inc. | ||
| Variable Costing Income Statement | ||
| Forthe Month Ended August 31 | ||
| $ | ||
| $ | ||
| $ | ||
| Fixed costs: | ||
| $ | ||
| $ | ||
c.What is the reason for the difference in the amount of income fromoperations reported in (a) and (b)?
Under the method, thefixed manufacturing cost included in the cost of goods sold ismatched with the revenues. Under , all of the fixed manufacturingcost is deducted in the period in which it is incurred, regardlessof the amount of inventory change. Thus, when inventory increases,the income statement will have a higher income from operations thanwill the variable costing income statement.
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