Question

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:

1	Sales (38,000 units)		$9,500,000.00
2	Production costs (46,500 units):
3	Direct materials	$4,650,000.00
4	Direct labor	1,860,000.00
5	Variable factory overhead	1,162,500.00
6	Fixed factory overhead	697,500.00	8,370,000.00
7	Selling and administrative expenses:
8	Variable selling and administrative expenses	$1,250,000.00
9	Fixed selling and administrative expenses	235,000.00	1,485,000.00

	Required:
a.	Prepare an income statement according to the absorption costing concept.*
b.	Prepare an income statement according to the variable costing concept.*
c.	What is the reason for the difference in the amount of Operating income reported in (a) and (b)? * Be sure to complete the statement heading. Refer to the list of Labels and Amount Descriptions provided for the exact wording of the answer choices for text entries. A colon (:) will automatically appear if it is required. Enter amounts as positive numbers unless the amount is a calculation that results in a negative amount. For example: Net loss should be negative. Expenses should be positive.

Answer 1

Working Note- Gallatin County
	As per Absorption	As per Variable
Variable Manufacturing cost (4650000+1860000+1162500)	$7,672,500.00	$7,672,500.00
Fixed Factory overhead	$697,500.00
Cost of Production	$8,370,000.00	$7,672,500.00
The Absorption Costing Income Statement
	$
No. of Unit Sold	38000
Sales	$9,500,000
Less: Cost of Goods sold (8370000/46500*38000)	$6,840,000
Gross Margin	$2,660,000
Less: Other Expense
Variable Selling & Admin Expense	$1,250,000
Fixed Selling & Admin Expense	$235,000
Net operating income	$1,175,000
The Variable Costing Income Statement
	$
No. of Unit Sold	38000
Sales	$9,500,000
Less: Variable cost
variable Manaufacturing cost (7672500/46500*38000)	$6,270,000.00
Variable Selling & Admin Expense	$1,250,000
Contribution margin	$1,980,000.00
Fixed expense:
Fixed Factory Overhead	$697,500.00
Fixed Selling & Admin Expense	$235,000
Net operating Income	$1,047,500.00

3. The difference in Income as absorption costing and Variable costing is due to Fixed Overhead cost has been deferred in Ending inventory in Absoprtion costing.however, full fixed manufacturign overhead has been charged in variable costing .