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 (11,500 units) $1,265,000 Production costs (15,000 units): Direct materials $610,500 Direct labor 292,500 Variable factory overhead 147,000 Fixed factory overhead 97,500 1,147,500 Selling and administrative expenses: Variable selling and administrative expenses $177,900 Fixed selling and administrative expenses 68,900 246,800 If required, round interim per-unit calculations to the nearest cent. a. Prepare an income statement according to the absorption costing conceptShawnee Motors Inc. Absorption Costing Income Statement For the Month Ended August 31 Sales $ 1,705,000 Cost of goods sold $ $ b. Prepare an income statement according to the variable costing concept. Shawnee Motors Inc. Variable Costing Income Statement For the Month Ended August 31 $ $ $ Fixed costs: $ $ 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..

Preparation of Income statement under absorption is shown below

Preparation of Income statement under variable costing is shown below

The reason for the difference in the amount of income from operations reported in (a) and (b) is shown below

Explanation:

Working note :-

                                             Cost           Unit         Unit cost

Direct material                    $610,500    15,000     40.7

Direct labor                         $292,500   15,000     19.5

Variable factory overhead  $147,000   15,000     9.8 (40.7 + 19.5 + 9.8) = 70

Fixed factory overhead       $97,500    15,000      6.5

Unit product cost                                                      76.5

a.                         Income statement - Absorption

Sales                                      $1,265,000

Cost of goods sold                 $879,750

(11,500 × 76.5)

Gross profit                              $385,250

Fixed Selling and administrative

expenses                                  $246,800

Income from operations          $138,450

b.                           Income statement - Variable costing

Sales                                        $1,265,000

Variable cost of goods sold   $805,000

(11,500 × 70)

Manufacturing margin             $460,000

Variable Selling and administrative

expenses                                    $177,900

Contribution Margin                   $282,100

Fixed cost:

Fixed factory overhead $97,500

Fixed selling and

administration                 $68,900  $166,400

Income from operations                  $115,700

c. Difference is due the part of fixed manufacturing cost related to ending inventory

Variable                                        $115,700

Add: (15,000 - 11,500) × $6.50    $22,750

As per absorption costing            $138,450

In the absorption costing the fixed manufacturing cost involves in the cost of goods sold is equal with the revenue.

and In the variable costing all the fixed manufacturing cost is less in the period in which it is incurred, apart of the amount of change of Inventory.

Therefore, When inventory increases, income statement will having higher income from operations than will the variable costing income statement.

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