Income Statements under Absorption and Variable Costing Shaw

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.

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b. Prepare an income statement according to the variable costing concept.

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c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?

Under the absorption costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under variable costing , 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 (18,500 units)		$2,960,000
Production costs (24,000 units):
Direct materials	$1,420,800
Direct labor	681,600
Variable factory overhead	340,800
Fixed factory overhead	228,000		2,671,200
Selling and administrative expenses:
Variable selling and administrative expenses	$414,000
Fixed selling and administrative expenses	160,300		574,300

Solution

Shawnee Motors Inc.

Absorption Costing Income Statement

For the Month Ended August 31

Sales

$                2,960,000.00

Cost of goods sold

$                2,059,050.00

Gross profit

$                   900,950.00

Selling and administrative expenses

$                   479,425.00

Income from operations

$                   421,525.00

Cost Of Goods manufactured

Material Cost

$                      1,420,800.00

Direct Labor

$                          681,600.00

Variable Factory Overheads

$                          340,800.00

Fixed Factory Overheads

$                          228,000.00

Total Cost

$                      2,671,200.00

Units Produced

24000

Cost Per Unit produced

$                                  111.30

Cost of Goods Sold

Opening Stock

$                                            -  

Cost of Goods manufactured

$                      2,671,200.00

Less: Cost of Finished Goods

$                          612,150.00

Cost of Goods Sold

$                      2,059,050.00

Shawnee Motors Inc.

Variable Costing Income Statement

For the Month Ended August 31

Sales

$2,960,000.00

Variable cost of goods sold

$1,883,300.00

Manufacturing margin

$1,076,700.00

Variable selling and administrative expenses

$   319,125.00

Contribution margin

$   757,575.00

Fixed costs:

Fixed factory overhead

$                   228,000.00

Fixed selling and administrative expenses

$                   160,300.00

Total fixed costs

$   388,300.00

Income from operations

$   369,275.00

Shawnee Motors Inc.
Absorption Costing Income Statement
For the Month Ended August 31
Sales	$                2,960,000.00
Cost of goods sold	$                2,059,050.00
Gross profit	$                   900,950.00
Selling and administrative expenses	$                   479,425.00
Income from operations	$                   421,525.00