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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.

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Answer:

a.Absorption Costing Income Statement For the Month Ended July 31

Sales                                                                                 $2,080,000

Less Cost of Goods Sold

Opening Stock                                                   0

Add Cost of Goods Manufactured           $1,892,100

Less Closing Stock (4,000×$111,30)         ($445,200)    ($1,446,900)

Gross Profit                                                                           $633,100

Less Expenses :

Selling and administrative expenses:

Variable selling and administrative expenses                 ($293,300)

Fixed selling and administrative expenses                       ($113,500)

Net Income                                                                          $226,300

b.Variable Costing Income Statement For the Month Ended July 31

Sales                                                                                 $2,080,000

Less Cost of Goods Sold

Opening Stock                                                   0

Add Cost of Goods Manufactured           $1,730,600

Less Closing Stock (4,000×$101,80)         ($407,200)    ($1,323,400)

Contribution                                                                         $756,600

Less Expenses :

Fixed factory overhead                                                       ($161,500)

Selling and administrative expenses:

Variable selling and administrative expenses                 ($293,300)

Fixed selling and administrative expenses                       ($113,500)

Net Income                                                                            $118,300

c. Fixed Costs under absorption costing have been deferred to Closing Inventory

Explanation:

Absorption Costing

Absorption Costing Product Cost = Direct Materials + Direct Labor + Variable Overheads + Fixed Overheads

                                                          = $1,892,100 / 17,000

                                                          = $111,30

Absorption Costing Period Cost  = All Non - Manufacturing Costs

Absorption Costing Income Statement For the Month Ended July 31

Sales                                                                                 $2,080,000

Less Cost of Goods Sold

Opening Stock                                                   0

Add Cost of Goods Manufactured           $1,892,100

Less Closing Stock (4,000×$111,30)         ($445,200)    ($1,446,900)

Gross Profit                                                                           $633,100

Less Expenses :

Selling and administrative expenses:

Variable selling and administrative expenses                 ($293,300)

Fixed selling and administrative expenses                       ($113,500)

Net Income                                                                          $226,300

Variable Costing

Variable Costing Product Cost = Direct Materials + Direct Labor + Variable Overheads

                                                          = ($1,892,100 - $161,500) / 17,000

                                                          = $101,80

Absorption Costing Period Cost  = All Non - Manufacturing Costs + Fixed Overheads Expenses

Variable Costing Income Statement For the Month Ended July 31

Sales                                                                                 $2,080,000

Less Cost of Goods Sold

Opening Stock                                                   0

Add Cost of Goods Manufactured           $1,730,600

Less Closing Stock (4,000×$101,80)         ($407,200)    ($1,323,400)

Contribution                                                                         $756,600

Less Expenses :

Fixed factory overhead                                                       ($161,500)

Selling and administrative expenses:

Variable selling and administrative expenses                 ($293,300)

Fixed selling and administrative expenses                       ($113,500)

Net Income                                                                            $118,300

the reason for the difference in the amount of operating income reported in (a) and (b)

Fixed Costs under absorption costing have been deferred to Closing Inventory

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