Income Statements under Absorption Costing and Variable CostingCrazy Mountain Sports Inc. assembles and sells snowmobile engines. The company began operations on March 1 and operated at 100% of capacity during the first month. The following data summarize the results for March:Line Item DescriptionAmountAmountSales (12,500 units) $6,250,000Production costs (15,000 units): Direct materials$1,800,000 Direct labor1,275,000 Variable factory overhead225,000 Fixed factory overhead600,0003,900,000Selling and administrative expenses: Variable selling and administrative expenses$125,000 Fixed selling and administrative expenses45,000170,000Question Content Areaa. Prepare an income statement according to the absorption costing concept.Crazy Mountain Sports Inc.Absorption Costing Income StatementFor the Month Ended March 31Line Item DescriptionAmount $- Select - - Select - $- Select - - Select - $- Select - Question Content Areab. Prepare an income statement according to the variable costing concept.Crazy Mountain Sports Inc.Variable Costing Income StatementFor the Month Ended March 31Line Item DescriptionAmountAmount $- Select - - Select - $- Select - - Select - $- Select -Fixed costs: $- Select - - Select -blank - Select - $- Select - Question Content Areac. What is the reason for the difference in the amount of operating income reported in (a) and (b)?Under the fill in the blank 1 of 3 method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under fill in the blank 2 of 3 , 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 fill in the blank 3 of 3 income statement will have a higher operating income.

The company's financial performance over a specific time period is explained in the income statement. This crucial statement indicates whether the business has made a profit or a loss. The income statement is used to compute various ratios, including interest coverage ratios, profit margins, and earnings per share.Computation of the Absorption Costing Income Statement Crazy Mountains Sports Inc.Absorption Costing Income Statement For the Month Ended March 31Sales62,50,000Less: Cost of goods sold=3900000*(12500/15000)Gross Profit 30,00,000Less: Selling and administrative expenses1,70,000Operating income28,30,000Computation of the Variable Costing Income Statement Crazy Mountains Sports Inc.Variable Costing Income Statement For the Month Ended March 31Sales revenue 62,50,000Less: Variable cost of goods old2750000Manufacturing margin 35,00,000Less: Variable selling and administrative expenses125000Contribution margin 33,75,000Less: Fixed costs =600000+45000Operating Income27,30,000=1800000*(12500/15000)$1,500,000=1275000*(12500/15000)1,062,500=225000*(12500/15000)187,500Cost of goods sold2,750,000y Final Answer Crazy Mountains Sports Inc.Absorption Costing Income Statement For the Month Ended March 31Sales62,50,000Cosy of goods sold3250000Gross Profit 30,00,000Selling and administrative expenses1,70,000Operating income28,30,000Crazy Mountains Sports Inc.Variable Costing Income Statement For the Month Ended March 31Sales revenue 62,50,000Less: Variable cost of goods old2750000Manufacturing margin 35,00,000Less: Variable selling and administrative expenses125000Contribution margin 33,75,000Less: Fixed costs 645000Operating Income27,30,000There will be a difference in Operating Income of $100,00. The $ $100,00 of Fixed Factory Overheads has been deferred in Inventory in absorption Costing.

Answered: Mountain Sports Inc. assembles and…

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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Line Item Description	Amount	Amount
Sales (12,500 units)		$6,250,000
Production costs (15,000 units):
Direct materials	$1,800,000
Direct labor	1,275,000
Variable factory overhead	225,000
Fixed factory overhead	600,000	3,900,000
Selling and administrative expenses:
Variable selling and administrative expenses	$125,000
Fixed selling and administrative expenses	45,000	170,000

Question Content Area

a. Prepare an income statement according to the absorption costing concept.

Crazy Mountain Sports Inc.Absorption Costing Income StatementFor the Month Ended March 31

Line Item Description	Amount
	$- Select -
	- Select -
	$- Select -
	- Select -
	$- Select -

Question Content Area

b. Prepare an income statement according to the variable costing concept.

Crazy Mountain Sports Inc.Variable Costing Income StatementFor the Month Ended March 31

Line Item Description	Amount	Amount
		$- Select -
		- Select -
		$- Select -
		- Select -
		$- Select -
Fixed costs:
	$- Select -
	- Select -	blank
		- Select -
		$- Select -

Question Content Area

c. What is the reason for the difference in the amount of operating income reported in (a) and (b)?
Under the fill in the blank 1 of 3

method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under fill in the blank 2 of 3

, 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 fill in the blank 3 of 3

income statement will have a higher operating income.

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