Income Statements under Absorption Costing 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: $2,800,000 Sales (20,000 units) Production costs (26,000 units): Direct materials $1,346,800 Direct labor 647,400 Variable factory overhead 322,400 Fixed factory overhead 215,800 2,532,400 Selling and administrative expenses: Variable selling and administrative expenses $392,500 Fixed selling and administrative expenses 151,900 544,400 If required, round interim per-unit calculations to the nearest cent. 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 Sales 2,800,000 Cost of goods sold 1,948,000 eBook Show Me How CUSLUT yuuus SUTU 1,948,000 Gross profit 852,000 Selling and administrative expenses 544,400 Operating income . 307,600 Feedback 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 Sales 2,800,000 Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses 392,500 Contribution margin 5 Fixed costs: Fixed factory overhead costs 215,800 Fixed selling and administrative expenses 151,900 Total fivad cnctc .1 --- W P Variable selling and administrative expenses 392,500 Contribution margin Fixed costs: Fixed factory overhead costs 215,800 Fixed selling and administrative expenses 151,900 Total fixed costs 367.700 Operating income 567,750 X Feedback c. What is the reason for the difference in the amount of operating income reported in (a) and (b)? Under the absorption costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under variable 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 costing income statement will have a higher operating income. Feedback