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: $1,620,000 Sales (18,000 units) Production costs (23,000 units): Direct materials Direct labor Variable factory overhead Fixed factory overhead Selling and administrative expenses: Variable selling and administrative expenses Fixed selling and administrative expenses $765,900 368,000 184,000 121,900 1,439,800 $223,200 86,400 309,600 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 1,620,000 Cost of goods sold $ Gross profit Selling and administrative expenses 309,600 $ Operating income 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 1,620,000 1,439,800 Variable cost of goods sold Manufacturing margin $ X 180,200 Variable selling and administrative expenses 309,600 Contribution margin $ X 129,400 Fixed costs: Fixed factory overhead costs Fixed selling and administrative expenses Total fixed costs Operating income T Feedback Check My Work b. Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. 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 Check My Work c. Consider what causing the difference in operating income reported under the two methods. There is a need for management to exercise care in interpreting operating income reported under absorption costing when significant changes in inventory levels occur