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 (17,000 units) $1,700,000 Production costs (22,000 units): Direct materials $814,000 Direct labor 391,600 Variable factory overhead 195,800 Fixed factory overhead 129,800 1,531,200 Selling and administrative expenses: Variable selling and administrative expenses $237,300 Fixed selling and administrative expenses 91,900 329,200 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 Sales $Sales Cost of goods sold Cost of goods sold Gross profit $Gross profit Selling and administrative expenses Selling and administrative expenses Operating income $Operating income Feedback Area Feedback 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 Sales $Sales Variable cost of goods sold Variable cost of goods sold Manufacturing margin $Manufacturing margin Variable selling and administrative expenses Variable selling and administrative expenses Contribution margin $Contribution margin Fixed costs: Fixed factory overhead costs $Fixed factory overhead costs Fixed selling and administrative expenses Fixed selling and administrative expenses Total fixed costs Total fixed costs Operating income $Operating income Feedback Area Feedback Question Content Area 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 Area Feedback