Question

Shawnee Motors Inc. assembles and sells snowmobile engines. 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:

1	Sales (31,000 units)		$7,750,000.00
2	Production costs (38,000 units):
3	Direct materials	$3,040,000.00
4	Direct labor	1,710,000.00
5	Variable factory overhead	950,000.00
6	Fixed factory overhead	570,000.00	6,270,000.00
7	Selling and administrative expenses:
8	Variable selling and administrative expenses	$1,120,000.00
9	Fixed selling and administrative expenses	200,000.00	1,320,000.00

	Required:
a.	Prepare an income statement according to the absorption costing concept.*
b.	Prepare an income statement according to the variable costing concept.*
c.	What is the reason for the difference in the amount of income from operations reported in (a) and (b)? * Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. Enter all amounts as positive numbers.

Answer 1

Solution a:

Е F G 1 2 3 Shawnee Motors Inc. Income Statement (Absorption Costing) For the Month ended August 31 5 $7,750,000 Sales Less: Cost Of Goods sold 7 [$6270000/38000*31000] $5,115,000 $2,635,000 $1,320,000 $1,315,000 Gross Profit 8 Less: Selling and administrative Expenses Income from Operation 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 Sheet144 (2) Sheet826 Sheet828 Sheet830 et824 II

Solution b:

Н K 1 3. Shawnee Motors Inc. Income Statement (Variable Cos ting) 5 For the month ended August 31 $7,750,000 Sales 6 7 Variable Cost of Goods sold [($3040000+$1710000+$950000)/38000*31000] Manufacturing Margin Variable Selling and administrative Expenses Contribution margin Less: Fixed Expens es Fixed Factory Overhead Fixed Selling and adminis trative expenses Total Fixed cos ts Income from Operation $4,650,000 $3,100,000 $1,120,000 $1,980,000 8 9 10 11 $570,000 12 $200,000 13 $770,000 $1,210,000 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Sheet144 (2) Sheet826 Sheet828 Sheet830 et824 II

Solution c:

The reason for the difference in the amount of income from operations reported in (a) and (b) is because fixed factory overhead ($570000/38000 *7000 = $105000) is deferred in ending inventory of 7000 units under absorption costing