Income Statements under Absorption and Variable Costing Shaw

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 31

Solution

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