1. ncome Statements under The reporting of the costs of manufactured products, normally direct materials, direct labor, and factory overhead, as product costs.Absorption Costing and The concept that considers the cost of products manufactured to be composed only of those manufacturing costs that increase or decrease as the volume of production rises or falls (direct materials, direct labor, and variable factory overhead).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 (4,000 units)				$2,600,000
   Production costs (4,350 units):
   Direct materials		$1,218,000
   Direct labor		522,000
   Variable factory overhead		87,000
   Fixed factory overhead		130,500		1,957,500
   Selling and administrative expenses:
   Variable selling and administrative expenses		$60,000
   Fixed selling and administrative expenses		25,000		85,000

   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
   Cost of goods sold Direct labor Direct materials Fixed factory overhead costs Sales	$
   Cost of goods sold Production costs Sales Selling and administrative expenses Variable factory overhead
   Cost of goods available for sale Cost of goods sold Production costs Gross profit Sales	$
   Direct materials Fixed factory overhead costs Production costs Selling and administrative expenses Variable factory overhead
   Operating income Loss from operations	$

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   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
   Fixed factory overhead costs Fixed selling and administrative expenses Manufacturing margin Production costs Sales		$
   Direct materials Fixed factory overhead costs Manufacturing margin Production costs Variable cost of goods sold
   Fixed factory overhead costs Fixed selling and administrative expenses Manufacturing margin Production costs Sales		$
   Manufacturing margin Production costs Sales Variable cost of goods sold Variable selling and administrative expenses
   Contribution margin Operating income Loss from operations Manufacturing margin		$
   Fixed costs:
   Direct labor Direct materials Fixed factory overhead costs Production costs Sales	$
   Direct labor Fixed selling and administrative expenses Manufacturing margin Production costs Variable selling and administrative expenses
   Contribution margin Operating income Manufacturing margin Sales Total fixed costs
   Operating income Loss from operations		$

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   c. What is the reason for the difference in the amount of operating Income reported in (a) and (b)?

   Under the

   • absorption costing
   • variable costing
   method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under
   • absorption costing
   • 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
   • variable costing
   income statement will have a higher operating income.

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