FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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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 (35,000 units)
|
|
$10,500,000.00
|
|
2
|
Production costs (41,000 units):
|
|
|
|
3
|
Direct materials
|
$4,100,000.00
|
|
|
4
|
Direct labor
|
2,255,000.00
|
|
|
5
|
Variable factory
|
1,025,000.00
|
|
|
6
|
Fixed factory overhead
|
615,000.00
|
7,995,000.00
|
|
7
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Selling and administrative expenses:
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|
|
|
8
|
Variable selling and administrative expenses
|
$1,140,000.00
|
|
|
9
|
Fixed selling and administrative expenses
|
225,000.00
|
1,365,000.00
|
| 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)?
|
Expert Solution
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Step 1
Variable costing means that inventory is valued at variable manufacturing cost and fixed cost is ignored. Absorption costing means that inventory is valued at total manufacturing cost including fixed manufacturing cost.
Variable cost is the cost which vary with the level of output where as fixed cost remain fixed what ever may be the level of output.
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