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 (18,500 units) $2,960,000 Production costs (24,000 units): Direct materials $1,420,800 Direct labor 681,600 Variable factory overhead 340,800 Fixed factory overhead 228,000 2,671,200 Selling and administrative expenses: Variable selling and administrative expenses $414,000 Fixed selling and administrative expenses 160,300 574,300 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 2,960,000 Cost of goods sold 2,059,050 Gross profit 900,950 Selling and administrative expenses 479,425 X Operating income 421,525 X 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 2,960,000 Variable cost of goods sold 1,883,300 Manufacturing margin 1,076,700 Variable selling and administrative expenses 319,125 X Contribution margin 757,575 X Fixed costs: Fixed factory overhead costs 228,000 Fixed selling and administrative expenses 160,300 Total fixed costs 388,300 Operating income 369,275 X 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 , 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