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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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