Question

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. The following data summarize the results for July: 

Sales (4,000 units) $2,600,000 Production costs (4,350 units): Direct materials $1,218,000 Direct labor 522,000 Variable factory overhead 87,000 Fixed factory overhead 130,500 1,957,500 Selling and administrative expenses: Variable selling and administrative expenses $60,000 Fixed selling and administrative expenses 25,000 85,000

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

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

Answer 1

Solution Computation of cost of goods sold under absorption costing and Variable costing Direct Materials Direct labor Variable factory overhead Fixed factory overhead Total product cost Absorption Costing $1,218,000 $522,000 $87,000 $130,500 $1,957,500 Variable Costing $1,218,000 $522,000 $87,000 $1,827,000 No. of units produced Product cost per unit (product cost/units produced) 4350 $450 4350 $420 No. of units sold Cost of Goods sold (Units sold x product cost) 4000 $1,800,000 4000 $1,680,000 Required a. Gallatin County Motors Inc. Absorption Costing Income Statement For the Month Ended July 31 Sales Cost of Goods sold Gross profit Selling and administrative expenses Operating Income $2,600,000 $1,800,000 $800,000 $85,000 $715,000 Required b. Gallatin County Motors Inc. Variable Costing Income Statement For the Month Ended July 31 Sales Cost of Goods sold Gross margin/Product margin Variable Selling and administrative expenses Contribution margin Fixed costs: Fixed factory overhead $130,500 Fixed Selling and administrative expenses $25,000 Total fixed expenses Operating Income $2,600,000 $1,680,000 $920,000 $60,000 $860,000 $155,500 $704,500