Question

Income Statements under Absorption Costing and Variable Costing Gallatin County Motors Inc. assembles and sells snowmobile...

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) $2,400,000
Production costs (21,000 units):
Direct materials $1,165,500
Direct labor 558,600
Variable factory overhead 279,300
Fixed factory overhead 186,900 2,190,300
Selling and administrative expenses:
Variable selling and administrative expenses $339,500
Fixed selling and administrative expenses 131,400 470,900

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
$
$
$

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 costs:
$
$

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.

Homework Answers

Answer #1
Gallatin County Motors Inc
Absorption Costing Income Statement
For the Month Ended July 31
Sales 2400000
Cost of goods sold 1668800 =2190300/21000*16000
Gross profit 731200
Selling and administrative expenses 470900
Income from operations 260300
2
Gallatin County Motors Inc.
Variable Costing Income Statement
For the Month Ended July 31
Sales 2400000
Variable cost of goods sold 1526400 =(2190300-186900)/21000*16000
Manufacturing margin 873600
Variable selling and administrative expenses 339500
Contribution margin 534100
Fixed costs:
Fixed factory overhead 186900
Fixed selling and administrative expenses 131400
Total fixed costs 318300
Income from operations 215800
3
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
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