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 (12,500 units)		$1,375,000
Production costs (16,000 units):
Direct materials	$651,200
Direct labor	312,000
Variable factory overhead	156,800
Fixed factory overhead	104,000		1,224,000
Selling and administrative expenses:
Variable selling and administrative expenses	$189,700
Fixed selling and administrative expenses	73,400		263,100

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

a.

Cost of goods soldDirect laborDirect materialsFixed factory overhead costsSalesSales	$Sales
Cost of goods soldGross profitSalesSelling and administrative expensesVariable factory overheadCost of goods sold	Cost of goods sold
Direct laborDirect materialsGross profitFixed factory overhead costsSalesGross profit	$Gross profit
Cost of goods soldFixed factory overhead costsSalesSelling and administrative expensesVariable factory overheadSelling and administrative expenses	Selling and administrative expenses
Operating incomeLoss from operationsOperating income	$Operating income

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.

Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expensesSales		$Sales
Fixed factory overhead costsFixed selling and administrative expensesManufacturing marginVariable cost of goods soldVariable selling and administrative expensesVariable cost of goods sold		Variable cost of goods sold
Contribution marginManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expensesManufacturing margin		$Manufacturing margin
Fixed factory overhead costsFixed selling and administrative expensesManufacturing marginVariable cost of goods soldVariable selling and administrative expensesVariable selling and administrative expenses		Variable selling and administrative expenses
Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expensesContribution margin		$Contribution margin
Fixed costs:
Contribution marginFixed factory overhead costsManufacturing marginSalesVariable cost of goods soldFixed factory overhead costs	$Fixed factory overhead costs
Fixed selling and administrative expensesManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expensesFixed selling and administrative expenses	Fixed selling and administrative expenses
Contribution marginOperating incomeManufacturing marginSalesTotal fixed costsTotal fixed costs		Total fixed costs
Operating incomeLoss from operationsOperating income		$Operating income