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 $(19,500$ units$)$ $$2,535,000$

Production costs $(25,000$ units$)$:

Direct materials $$1,202,500$

Direct labor $577,500$

Variable factory overhead $287,500$

Fixed factory overhead $192,5002,260,000$

Selling and administrative expenses:

Variable selling and administrative expenses $$350,300$

Fixed selling and administrative expenses $135,600485,900$

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 $31$

$$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

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 $31$

$$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

Fixed costs:

$$-$ Select $-$

$-$ Select $-$

$-$ Select $-$

$$-$ Select $-$

Question Content Area

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 revenues. Under

$,$ 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

income statement will have a higher operating income.