Income statements under absorption 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. The following data summarize the results for July: Sales (3,000 units) $2,310,000 Production costs (3,000 units): Direct materials $993,300 Direct labor 427,200 Variable factory overhead 69,600 Fixed factory overhead 109,200 1,599,300 Selling and administrative expenses: Variable selling and administrative expenses $49,600 Fixed selling and administrative expenses 20,800 70,400 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. Gallatin County Motors Inc. Absorption Costing Income Statement For the Month Ended July 31 $ $ $ b. Prepare an income statement according to the variable costing concept. Gallatin County Motors Inc. Variable Costing Income Statement For the Month Ended July 31 $ $ $ Fixed costs: $ $ c. What is the reason for the difference in the amount of Operating income reported in (a) and (b)

An income statement for Gallatin County Motors, Inc. uses an absorption costing approach to calculate the cost of production and net income by accounting for all production expenses, including fixed overheads.

It gives a gross profit statistic that compares the whole cost of manufacturing to the income from services.

The calculations of the net operating income have been attached below.

c. Reason for the discrepancy in operating income amounts in (a) and (b):

In this scenario, there is no distinction. If there were beginning and closing inventories, a difference would develop due to the different treatment of fixed production overheads, which are included in product costs.

This same existence between marking inventories creates differences in the recorded net income.

Another distinction is that, although an absorption costing income statement shows gross profit before net profit, a flexible budget income statement shows a contribution margin and treats all fixed expenses as period costs.

To know more about the calculations of the net operating income, refer to the link below:

link

Gallatin County Motors, Inc.

a. Gallatin County Motors Inc. Absorption Costing Income Statement For the Month Ended July 31:

Sales (3,000 units)                           $2,310,000

Production costs (3,000 units):

Direct materials              $993,300

Direct labor                       427,200

Variable factory overhead 69,600

Fixed factory overhead    109,200

Total production costs  1,599,300    1,599,300

Gross profit                                          $710,700

Selling and administrative expenses:

Variable selling and administrative    $49,600

Fixed selling and administrative          20,800

Net Income                                       $640,300

b. Gallatin County Motors Inc. Variable Costing Income Statement For the Month Ended July 31:

Sales (3,000 units)                                             $2,310,000

Production costs (3,000 units):

Direct materials                                 $993,300

Direct labor                                          427,200

Variable factory overhead                    69,600

Variable selling and administrative     49,600

Total production costs                    1,539,700    1,539,700

Contribution                                                         $770,300

Fixed expenses:

Fixed factory overhead                    109,200

Fixed selling and administrative       20,800       130,000

Net Income                                                        $640,300

c. Reason for the difference in the amount of the operating income in (a) and (b):

There is no difference in this case.  A difference would arise if there were  beginning and closing inventories from the different treatment of fixed production overheads, which are absorbed in the product costs.

Explanation:

Gallatin County Motors, Inc.'s income statement under absorption costing technique measures the cost of production and net income by taking into full account the full production costs, including fixed overheads.  It reports a gross profit figure which compares the full cost of production and the service revenue.

On the other hand, Gallatin County Motors, Inc.'s income statement under the variable costing technique measures the cost of production and net income by taking into account all the variable costs.  With this technique, a contribution margin is the difference between service revenue and variable costs.

Differences in the reported net income arise from the presence of beginning and ending inventory.  Another difference is that while absorption costing income statement reports a gross profit figure before net income, the variable costing income statement reports a contribution margin and, in addition, regards all fixed costs as period costs.

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