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 (18,000 units) $2,880,000 Production costs (23,000 units): Direct materials $1,361,600 Direct labor 653,200 326,600 218,500 2,559,900 Variable factory overhead Fixed factory overhead Selling and administrative expenses: Variable selling and administrative expenses Fixed selling and administrative expenses $396,800 153,600 550,400 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 2,880,000 | Cost of goods sold 2,003,400 Gross profit Selling and administrative expenses Operating income 326,200 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 2,880,000 Variable cost of goods sold 1,832,400 Manufacturing margin Variable selling and administrative expenses 396,800 Contribution margin 650.800 Fixed costs: Fixed factory overhead costs Fixed selling and administrative expenses X Total fixed costs 372,100 Operating income 278,700 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 absorption costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under variable costing V, 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