Question

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 (19,500 units) $2,535,000
Production costs (25,000 units):
Direct materials $1,202,500
Direct labor 577,500
Variable factory overhead 287,500
Fixed factory overhead 192,500 2,260,000
Selling and administrative expenses:
Variable selling and administrative expenses $350,300
Fixed selling and administrative expenses 135,600 485,900

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

Required:
a. Prepare an income statement according to the absorption costing concept.
b. Prepare an income statement according to the variable costing concept.

Answer 1

a.Income statement according to the absorption costing concept.

Sales (19,500 units) $2,535,000

Less Cost of Goods Sold

Opening Stock $0

Add Cost of Goods Manufactured $2,260,000

Less Closing Stock ($497,200) ($1,762,800)

Gross Profit $772,200

Less Expenses :

Variable selling and administrative expenses ($350,300 )

Fixed selling and administrative expenses ($135,600)

Net Income / Loss $286,300

b.Income statement according to the variable costing concept.

Sales (19,500 units) $2,535,000

Less Cost of Goods Sold

Opening Stock $0

Add Cost of Goods Manufactured $2,067,500

Less Closing Stock ($454,850) ($1,612,650)

Contribution $922,350

Less Expenses :

Fixed factory overhead ($192,500)

Variable selling and administrative expenses ($350,300 )

Fixed selling and administrative expenses ($135,600)

Net Income / Loss $244,100

Step-by-step explanation:

Absorption Costing

Cost of Goods Manufactured - Absorption Costing

Direct materials $1,202,500

Direct labor $577,500

Variable factory overhead $287,500

Fixed factory overhead $192,500

Total $2,260,000

Inventory = (25,000 - 19,500) / 25,000 × $2,260,000

= $497,200

Variable Costing

Cost of Goods Manufactured - Variable Costing

Direct materials $1,202,500

Direct labor $577,500

Variable factory overhead $287,500

Total $2,067,500

Inventory = (25,000 - 19,500) / 25,000 × $2,067,500

= $454,850