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 (16,000 units) $1,440,000 Production costs (21,000 units): Direct materials $699,300 Direct labor 336,000 168,000 Variable factory overhead Fixed factory overhead 111,300 1,314,600 Selling and administrative expenses: Variable selling and administrative expenses Fixed selling and administrative expenses $203,800 78,900 282,700 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 $ 1,440,000 Cost of goods sold 1,001,600 Gross profit 438,400 Selling and administrative expenses 282,700 Operating Income $ 115,700 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 1,440,000 1,163,300 X Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses 276,700 X 203,800 Contribution margin 72,900 X Fixed costs: Fixed factory overhead costs $ 111,300 78,900 Fixed selling and administrative expenses Total fixed costs dropdown 190,200 Operating income -117,300 X Feedback c. What is the reason for the difference in the amount of operating income reported in (a) and (b)? all of the fixed manufacturing cost is deducted in the period in which it is incurred, Under the absorption costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under variable costing regardless of the amount of inventory change. Thus, when inventory increases, the absorption costing income statement will have a higher operating income