Income Statements under Absorption Costing and Variable Costing Feedback

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a$.$ Under absorption costing, the cost of goods manufactured includes direct materials, direct labor, and factory overhead costs. Both fixed and

variable factory costs are included as part of factory overhead.

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

Gallation County Motors Inc.

Variable Costing Income Statement

For the Month Ended July $31$

Variable selling and administrative exnenses Feedback

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b$.$ Under variable costing, the cost of goods manufactured includes only variable manufacturing costs.

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

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

variable 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 costing $$ income statement will have a higher operating income.

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:

Production costs units