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 (4,000 units) Production costs (4,350 units): Direct materials Direct labor $1,218,000 522,000 $2,600,000 Variable factory overhead Fixed factory overhead 87,000 130,500. 1,957,500 Selling and administrative expenses: Variable selling and administrative expenses $60,000 Fixed selling and administrative expenses 25,000 85,000 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 $800,000 X Cost of goods sold 556,800 X Gross profit 243,200 X Selling and administrative expenses 149,700 X Operating income 93,500 X Feedback Check My Work a. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead. 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 Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs: Fixed factory overhead costs 59.000 X 00000 Fixed selling and administrative expenses 41,800 Total fixed costs Operating income 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 method, the fixed manufacturing cost included in the cost of goods sold is matched with the , all of the fixed manufacturing cost is deducted in the period in which it is incurred, revenues. Under income statement will regardless of the amount of inventory change. Thus, when inventory increases, the 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 mananamant to avercice care in internration operation income renorted under ahenration costinn when significant