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 Description Amount Amount

Sales $(5,000$ units$)$ $$3,200,000$

Production costs $(5,000$ units$)$:

Direct materials $$1,376,000$

Direct labor $591,500$

Variable factory overhead $96,500$

Fixed factory overhead $151,5002,215,500$

Selling and administrative expenses:

Variable selling and administrative expenses $$68,700$

Fixed selling and administrative expenses $28,80097,500$

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

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.

Open spreadsheet

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

Crazy Mountain Sports Inc.

Absorption Costing Income Statement

For the Month Ended July $31$ Line Item Description Amount

$

fill in the blank $3$

fill in the blank $5$

$

fill in the blank $7$

fill in the blank $9$

$

fill in the blank $11$

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

Crazy Mountain Sports Inc.

Variable Costing Income Statement

For the Month Ended July $31$ Line Item Description Amount Amount

$

fill in the blank $13$

fill in the blank $15$

$

fill in the blank $17$

fill in the blank $19$

$

fill in the blank $21$

Fixed costs:

$

fill in the blank $23$

fill in the blank $25$

fill in the blank $27$

$

fill in the blank $29$

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.