Income statements under absorption and variable costing

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 (3,000 units)				$1,530,000
Production costs (3,000 units):
Direct materials		$657,900
Direct labor		282,900
Variable factory overhead		46,200
Fixed factory overhead		72,300		1,059,300
Selling and administrative expenses:
Variable selling and administrative expenses		$32,800
Fixed selling and administrative expenses		13,800		46,600

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
		$ fill in the blank 3
		fill in the blank 5
		$ fill in the blank 7
		fill in the blank 9
		$ 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
					$ fill in the blank 13
					fill in the blank 15
					$ fill in the blank 17
					fill in the blank 19
					$ fill in the blank 21
Fixed costs:
		$ fill in the blank 23
		fill in the blank 25
					fill in the blank 27
					$ 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 method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under , 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 income statement will have a higher Operating income than will the variable costing income statement.