Reference no: EM132547255

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:

Sales (16,500 units) $2,640,000

Production costs (21,000 units):

Direct materials $1,243,200

Direct labor596,400

Variable factory overhead 298,200

Fixed factory overhead 199,500

                                   2,337,300

Selling and administrative expenses:

Variable selling and administrative expenses  $362,300

Fixed selling and administrative expenses    140,200

                                                            502,500

If required, round interim per-unit calculations to the nearest cent.

Question a. Make an income statement according to the absorption costing concept.

Question b. Make an income statement according to the variable costing concept.

Question 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.