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 following data summarize the results for July: Sales (13,500 units) $2,160,000 Production costs (17,000 units): Direct materials $1,006,400 Direct labor 482,800 Variable factory overhead 241,400 Fixed factory overhead 161,500 1,892,100 Selling and administrative expenses: Variable selling and admin $293,300 Fixed selling and administrative expenses 13,500 406,800 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 2,160,000 Cost of goods sold Gross profit Selling and administrative expenses 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 2,160,000 Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs: Fixed factory overhead costs 161,500 Fixed selling and administrative expenses 113,500 Total fixed costs 275,000 Operating income C. What is the reason for the difference in the amo nt 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 absorption 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 variable costing " income statement will have a higher operating income.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 (13,500 units) $2,160,000 Production costs (17,000 units): Direct materials $1,006,400 Direct labor 482,800 Variable factory overhead 241,400 Fixed factory overhead 161,500 1,892,100 Selling and administrative expenses: Variable selling and administrative expenses $293,300 Fixed selling and administrative expenses 113,500 406,800 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 $ 2,160,000 Cost of goods sold Gross profit Selling and administrative expenses 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 $ 2,160,000 Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs:For the Month Ended July 31 Sales $ 2,160,000 Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed costs: Fixed factory overhead costs $ 161,500 Fixed selling and administrative expenses 113,500 Total fixed costs 275,000 Operating income 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 absorption 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 variable costing income statement will have a higher operating income