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 (4,000 units) $2,040,000 Production costs (4,000 units): Direct materials $877,200 Direct labor 377,200 Variable factory overhead 61,600 Fixed factory overhead 96,400 1,412,400 Selling and administrative expenses: Variable selling and administrative expenses $43,800 Fixed selling and administrative expenses 18,400 62,200 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)? 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 than will the variable costing income statement

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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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 (4,000 units)		$2,040,000
Production costs (4,000 units):
Direct materials	$877,200
Direct labor	377,200
Variable factory overhead	61,600
Fixed factory overhead	96,400		1,412,400
Selling and administrative expenses:
Variable selling and administrative expenses	$43,800
Fixed selling and administrative expenses	18,400		62,200

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)?

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 than will the variable costing income statement.

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
$
2$
$4
Fixed costs:

Gallatin County Motors Inc.
Variable Costing Income Statement
For the Month Ended July 31
2$
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 than will the variable costing income
statement.
%24
%24

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