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. 

 

Sales (15,500 units)				$2,170,000
Production costs (20,000 units):
Direct materials		$1,036,000
Direct labor		498,000
Variable factory overhead		248,000
Fixed factory overhead		166,000		1,948,000
Selling and administrative expenses:
Variable selling and administrative expenses		$301,900
Fixed selling and administrative expenses		116,900		418,800

 

 

 income statement according to the absorption costing concept.

Cost of goods soldDirect laborDirect materialsFixed factory overhead costsSalesSales	$Sales
Cost of goods soldGross profitSalesSelling and administrative expensesVariable factory overheadCost of goods sold	Cost of goods sold
Direct labor Direct materials Gross profitFixed factory overhead costsSalesGross profit	$Gross profit
Cost of goods sold Fixed factory overhead costs Sales Selling and administrative expenses Variable factory overhead Selling and administrative expenses	Selling and administrative expenses
Operating income Loss from operations Operating income	$Operating income

 

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

Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expensesSales		$Sales
Fixed factory overhead costsFixed selling and administrative expensesManufacturing marginVariable cost of goods soldVariable selling and administrative expensesVariable cost of goods sold		Variable cost of goods sold
Contribution marginManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expensesManufacturing margin		$Manufacturing margin
Fixed factory overhead costsFixed selling and administrative expensesManufacturing marginVariable cost of goods soldVariable selling and administrative expensesVariable selling and administrative expenses		Variable selling and administrative expenses
Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expensesContribution margin		$Contribution margin
Fixed costs:
Contribution marginFixed factory overhead costsManufacturing marginSalesVariable cost of goods soldFixed factory overhead costs	$Fixed factory overhead costs
Fixed selling and administrative expensesManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expensesFixed selling and administrative expenses	Fixed selling and administrative expenses
Contribution marginOperating incomeManufacturing marginSalesTotal fixed costsTotal fixed costs		Total fixed costs
Operating incomeLoss from operationsOperating income		$Operating income

 

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

Under the

absorption costingvariable costing

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

absorption costingvariable costing

, 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

absorption costingvariable costing

income statement will have a higher operating income.

Answer rating: 100% (QA)

Steps Step 1 of 6 Absorption Costing Product Cost per unit Given Number of units produced 20000 units Absorption Costing Production Cost 20000 units Direct materials 1036000 Direct Labor 498000 Variab... View the full answer