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:

Sales (19,500 units) $1,755,000

Production costs (25,000 units):

Direct materials $832,500

Direct labor 400,000

Variable factory overhead 200,000

Fixed factory overhead 132,500 1,565,000

Selling and administrative expenses:

Variable selling and administrative expenses $242,600

Fixed selling and administrative expenses 93,900 336,500

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

Question Content Area

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

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Question Content Area

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

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Fixed costs:

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Question Content Area

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.

Pulf b. Prepare an income statement accoriling to the varable costing concept. C. What is the reacon foc the efference in the amount of operating income reportnd in (a)and(b) ? under the method, the fived manufacturing cost included in the cost of poods sold is matched wath the revenues. Under , all of the fired manufacturing cost is decucted in the persd in which it a ineurpa, regartiess of the arnount of inventery change. Thus, afen impertory indeasen, the income statement wal nave a higher oserating excome