Question

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 (13,000 units) $2,080,000 Production costs (17,000 units): Direct materials $1,006,400 Direct labor 482,800 Variable factory overhead 241,400 Fixed factory overhead 161,500 1,892,100 Selling and administrative expenses: Variable selling and administrative expenses $293,300 Fixed selling and administrative expenses 113,500 406,800 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.

Answer 1

	Gallatin County Motors Inc.
	Absorption Manufacturing Cost Per Unit
		Total	Per unit
`	Direct Material($100600/13000)	$     10,06,400.00	$                   77.42
	Direct Labor($482800/13000)	$        4,82,800.00	$                   37.14
	Variable Factory Overhead($241400/13000)	$        2,41,400.00	$                   18.57
	Fixed Manufacturing Overhead($161500/17000)	$        1,61,500.00	$                     9.50
		$     18,92,100.00	$                 142.62
	Variable Manufacturing Cost per unit
		Total	Per unit
	Direct Material	$     10,06,400.00	$                   77.42
	Direct Labor	$        4,82,800.00	$                   37.14
	Variable Factory Overhead	$        2,41,400.00	$                   18.57
	Total Variable cost per unit		$                 133.12
	Gallatin County Motors Inc.
	Net Operating Income under Absorption Costing
	Sales Units	13000
	Sales Price	$     20,80,000.00
	Cost of goods sold =Sales Units*$142.62	$     18,54,100.00
	Gross Margin	$        2,25,900.00
	Less:Selling expense($293300+$113500)	$        4,06,800.00
	Net Operating Income	$      -1,80,900.00
	Gallatin County Motors Inc.
	Net income under variable costing
	Units Sales	13000
	Sales Price	$     20,80,000.00
	Variable cost
	Variable cost of goods sold(1006400+482800+241400)	$     17,30,600.00
	Variable Selling Expense	$        2,93,300.00
	Total Variable Expenses	$     20,23,900.00
	Contribution=(Sales-Variable Expenses)	$           56,100.00
	Fixed Cost
	Less: Fixed production cost	$        1,61,500.00
	Less: Fixed Selling Expense	$        1,13,500.00
	Net Operative Income	$      -2,18,900.00
	Units in Beginning Inventory	0
	Units Produced during the month	17000
	Units sold during the year	13000
	Closing Inventory	4000
	Difference arises in Variable and Absorption Costing Method due to fixed Manufacturing Overhead cost deferred in Inventory
	Year
	Variable Costing Net Operating Profit	$      -2,18,900.00
	Add: Fixed Manufacturing Overhead cost deferred in Inventory(4000*$9.5)	$           38,000.00
	Net Operating Income under Absorption costing	$      -1,80,900.00