Income Statements under Absorption Costing and Variable Costing

Crazy 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 $(18,500$ units$)$$$1,665,000$Production costs $(24,000$ units$)$:$$Direct materials$$799,200$Direct labor$384,000$Variable factory overhead$192,000$Fixed factory overhead$127,2001,502,400$Selling and administrative expenses:$$Variable selling and administrative expenses$$232,900$Fixed selling and administrative expenses$90,100323,000$

If required, round interim per$-$unit calculations to the nearest cent.

Question Content Area

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

Crazy Mountain Sports Inc.

Absorption Costing Income Statement

For the Month Ended March $31$Line Item DescriptionAmount

Cost of goods soldDirect laborDirect materialsFixed factory overhead costsSales

$$-$ Select $-$

Cost of goods soldGross profitSalesSelling and administrative expensesVariable factory overhead

$-$ Select $-$

Direct laborDirect materialsGross profitFixed factory overhead costsSales

$$-$ Select $-$

Cost of goods soldFixed factory overhead costsSalesSelling and administrative expensesVariable factory overhead

$-$ Select $-$

Operating incomeLoss from operations

$$-$ Select $-$

Question Content Area

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

Crazy Mountain Sports Inc.

Variable Costing Income Statement

For the Month Ended March $31$Line Item DescriptionAmountAmount

Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expenses

$$-$ Select $-$

Fixed factory overhead costsFixed selling and administrative expensesManufacturing marginVariable cost of goods soldVariable selling and administrative expenses

$-$ Select $-$

Contribution marginManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expenses

$$-$ Select $-$

Fixed factory overhead costsFixed selling and administrative expensesManufacturing marginVariable cost of goods soldVariable selling and administrative expenses

$-$ Select $-$

Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expenses

$$-$ Select $-$Fixed costs:

Contribution marginFixed factory overhead costsManufacturing marginSalesVariable cost of goods sold

$$-$ Select $-$

Fixed selling and administrative expensesManufacturing marginSalesVariable cost of goods soldVariable selling and administrative expenses

$-$ Select $-$

Contribution marginManufacturing marginOperating incomeSalesTotal fixed costs

$-$ Select $-$

Operating incomeLoss from operations

$$-$ 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 $3$

absorption costingvariable costing

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

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 fill in the blank $3$ of $3$

absorption costingvariable costing

income statement will have a higher operating income.