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.

 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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