Analyzing Income under Absorption and Variable Costing

Variable manufacturing costs are $97 per unit, and fixed manufacturing costs are $110,600. Sales are estimated to be 5,600 units.

If an amount is zero, enter "0". Round intermediate calculations to the nearest cent and your final answers to the nearest dollar.

a. How much would absorption costing operating income differ between a plan to produce 5,600 units and a plan to produce 7,900 units?

b. How much would variable costing operating income differ between the two production plans?

Gallatin County Motors Inc. assembles and sells snowmobile engines. The company began operations on July 1 and operated at 100% of capacity during the first month. The following data summarize the results for July:

1	Sales (33,000 units)		$8,250,000.00
2	Production costs (40,500 units):
3	Direct materials	$3,240,000.00
4	Direct labor	1,822,500.00
5	Variable factory overhead	1,012,500.00
6	Fixed factory overhead	607,500.00	6,682,500.00
7	Selling and administrative expenses:
8	Variable selling and administrative expenses	$1,160,000.00
9	Fixed selling and administrative expenses	230,000.00	1,390,000.00

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 Operating income reported in (a) and (b)?

* Be sure to complete the statement heading. Refer to the list of Labels and Amount Descriptions provided for the exact wording of the answer choices for text entries. A colon (:) will automatically appear if it is required. Enter amounts as positive numbers unless the amount is a calculation that results in a negative amount. For example: Net loss should be negative. Expenses should be positive.

a. Prepare an income statement according to the absorption costing concept. Be sure to complete the statement heading. Refer to the list of Labels and Amount Descriptions provided for the exact wording of the answer choices for text entries. A colon (:) will automatically appear if it is required. Enter amounts as positive numbers unless the amount is a calculation that results in a negative amount. For example: Net loss should be negative. Expenses should be positive.

Gallatin County Motors Inc.

Absorption Costing Income Statement

b. Prepare an income statement according to the variable costing concept. Be sure to complete the statement heading. Refer to the list of Labels and Amount Descriptions provided for the exact wording of the answer choices for text entries. A colon (:) will automatically appear if it is required. Enter amounts as positive numbers unless the amount is a calculation that results in a negative amount. For example: Net loss should be negative. Expenses should be positive.

Gallatin County Motors Inc.

Variable Costing Income Statement

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c. What is the reason for the difference in the amount of Operating income reported in (a) and (b)? Check all that apply.

Under absorption costing, when inventory increases, the income statement will have a lower Operating income than will the variable costing income statement.

Under absorption costing, when inventory increases, the income statement will have a higher Operating income than will the variable costing income statement.

There is no difference; the Operating income reported in (a) and (b) is the same.

Under variable costing, the units that were produced but unsold include fixed factory overhead cost, which is not included in cost of goods sold.

Under variable costing, all of the fixed factory overhead cost is deducted in the period in which it is incurred, regardless of the amount of inventory change.

Inventory Valuation under Absorption Costing and Variable Costing

At the end of the first year of operations, 5,200 units remained in the finished goods inventory. The unit manufacturing costs during the year were as follows:

Direct materials	$41.90
Direct labor	17.90
Fixed factory overhead	6.10
Variable factory overhead	5.40

Determine the cost of the finished goods inventory reported on the balance sheet under (a) the absorption costing concept and (b) the variable costing concept.

Absorption costing	$fill in the blank 1
Variable costing	$fill in the blank 2

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