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Income Statements under Absorption Costing and Variable Costing

Crazy Mountain Sports Inc. assembles and sells snowmobile engines. The company began operations on March 1 and operated at 100% of capacity during the first month. The following data summarize the results for March:

Line Item Description	Amount	Amount
Sales (3,500 units)		$2,485,000
Production costs (4,000 units):
Direct materials	$1,221,200
Direct labor	525,200
Variable factory overhead	85,600
Fixed factory overhead	134,400	1,966,400
Selling and administrative expenses:
Variable selling and administrative expenses	$61,000
Fixed selling and administrative expenses	25,600	86,600

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

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.

Open spreadsheet

a. Prepare an income statement according to the absorption costing concept.

Line Item Description	Amount
Cost of goods soldDirect laborDirect materialsFixed factory overhead costsSalesSales		$ fill in the blank 3
Cost of goods soldGross profitSalesSelling and administrative expensesVariable factory overhead costsCost of goods sold		fill in the blank 5
Direct laborDirect materialsGross profitFixed factory overhead costsSalesGross profit		$ fill in the blank 7
Cost of goods soldFixed factory overhead costsSalesSelling and administrative expensesVariable factory overhead costsSelling and administrative expenses		fill in the blank 9
Operating incomeLoss from operationsOperating income		$ fill in the blank 11

b. Prepare an income statement according to the variable costing concept.

Line Item Description	Amount	Amount
Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expensesSales		$ fill in the blank 13
Fixed factory overhead costsFixed selling and administrative expensesManufacturing marginVariable cost of goods soldVariable selling and administrative expensesVariable cost of goods sold		fill in the blank 15
Contribution marginManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expensesManufacturing margin		$ fill in the blank 17
Fixed factory overhead costsFixed selling and administrative expensesManufacturing marginVariable cost of goods soldVariable selling and administrative expensesVariable selling and administrative expenses		fill in the blank 19
Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expensesContribution margin		$ fill in the blank 21
Fixed costs:
Contribution marginFixed factory overhead costsManufacturing marginSalesVariable cost of goods soldFixed factory overhead costs	$ fill in the blank 23
Fixed selling and administrative expensesManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expensesFixed selling and administrative expenses	fill in the blank 25
Contribution marginManufacturing marginOperating incomeSalesTotal fixed costsTotal fixed costs		fill in the blank 27
Operating incomeLoss from operationsOperating income		$ fill in the blank 29

c. What is the reason for the difference in the amount of operating income reported in (a) and (b)? Under the fill in the blank 1 of 3

absorption costingvariable costingabsorption costing

method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under fill in the blank 2 of 3

absorption costingvariable costingvariable costing

, 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 fill in the blank 3 of 3

absorption costingvariable costingabsorption costing

income statement will have a higher operating income.