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:

Sales (4,500 units)		$2,475,000
Production costs (5,000 units):
Direct materials	$1,182,500
Direct labor	508,500
Variable factory overhead	83,000
Fixed factory overhead	130,000		1,904,000
Selling and administrative expenses:
Variable selling and administrative expenses	$59,000
Fixed selling and administrative expenses	24,800		83,800

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.

Gallatin County Motors Inc.
Absorption Costing Income Statement
For the Month Ended July 31
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.

Gallatin County Motors Inc.
Variable Costing Income Statement
For the Month Ended July 31
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

absorption costingvariable costingabsorption costing

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

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

absorption costingvariable costingabsorption costing

income statement will have a higher Operating income than will the variable costing income statement.