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 (19,000 units) $1,710,000 Production costs (25,000 units): Direct materials $832,500 Direct labor 400,000 Variable factory overhead 200,000 Fixed factory overhead 132,500 1,565,000 Selling and administrative expenses: Variable selling and administrative expenses $242,600 Fixed selling and administrative expenses 93,900 336,500 If required, round interim per-unit calculations to the nearest cent. a. Prepare an income statement according to the absorption costing concept. Shawnee Motors Inc. Absorption Costing Income Statement For the Month Ended August 31 $ $ $ 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.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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 (19,000 units) | $1,710,000 | |||
| Production costs (25,000 units): | ||||
| Direct materials | $832,500 | |||
| Direct labor | 400,000 | |||
| Variable factory |
200,000 | |||
| Fixed factory overhead | 132,500 | 1,565,000 | ||
| Selling and administrative expenses: | ||||
| Variable selling and administrative expenses | $242,600 | |||
| Fixed selling and administrative expenses | 93,900 | 336,500 |
If required, round interim per-unit calculations to the nearest cent.
a. Prepare an income statement according to the absorption costing concept.
| Shawnee Motors Inc. | |
| Absorption Costing Income Statement | |
| For the Month Ended August 31 | |
| $ | |
| $ | |
| $ |
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
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