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 (19,500 units) $2,925,000 Production costs (25,000 units): Direct materials $1,387,500 Direct labor 665,000 Variable factory overhead 332,500 Fixed factory overhead 222,500 2,607,500 Selling and administrative expenses: Variable selling and administrative expenses $404,200 Fixed selling and administrative expenses 156,500 560,700 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 $Sales Cost of goods sold $Gross profit Selling and administrative expenses $Operating income Feedback a. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead. 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 $Sales Variable cost of goods sold $Manufacturing margin Variable selling and administrative expenses $Contribution margin Fixed costs: $Fixed factory overhead costs Fixed selling and administrative expenses Total fixed costs $Operating income Feedback b. Under variable costing, the cost of goods manufactured includes only variable manufacturing 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. 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 (19,500 units) $2,925,000 Production costs (25,000 units): Direct materials $1,387,500 Direct labor 665,000 Variable factory overhead 332,500 Fixed factory overhead 222,500 2,607,500 Selling and administrative expenses: Variable selling and administrative expenses $404,200 Fixed selling and administrative expenses 156,500 560,700 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 $Sales Cost of goods sold $Gross profit Selling and administrative expenses $Operating income Feedback a. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead. 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 $Sales Variable cost of goods sold $Manufacturing margin Variable selling and administrative expenses $Contribution margin Fixed costs: $Fixed factory overhead costs Fixed selling and administrative expenses Total fixed costs $Operating income Feedback b. Under variable costing, the cost of goods manufactured includes only variable manufacturing 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.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Sales (19,500 units)		$2,925,000
Production costs (25,000 units):
Direct materials	$1,387,500
Direct labor	665,000
Variable factory overhead	332,500
Fixed factory overhead	222,500		2,607,500
Selling and administrative expenses:
Variable selling and administrative expenses	$404,200
Fixed selling and administrative expenses	156,500		560,700

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

	$Sales
	Cost of goods sold
	$Gross profit
	Selling and administrative expenses
	$Operating income

Feedback

a. Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and variable factory costs are included as part of factory overhead.

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

		$Sales
		Variable cost of goods sold
		$Manufacturing margin
		Variable selling and administrative expenses
		$Contribution margin
Fixed costs:
	$Fixed factory overhead costs
	Fixed selling and administrative expenses
		Total fixed costs
		$Operating income

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b. Under variable costing, the cost of goods manufactured includes only variable manufacturing 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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