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: 1 Sales (38,000 units) $9,500,000.00 2 Production costs (44,000 units): 3 Direct materials $4,400,000.00 4 Direct labor 1,760,000.00 5 Variable factory overhead 1,100,000.00 6 Fixed factory overhead 660,000.00 7,920,000.00 7 Selling and administrative expenses: 8 Variable selling and administrative expenses $1,170,000.00 9 Fixed selling and administrative expenses 200,000.00 1,370,000.00 Required: a. Prepare an income statement according to the absorption costing concept\.\* b. Prepare an income statement according to the variable costing concept\.\* c. What is the reason for the difference in the amount of Operating income reported in (a) and (b)

a.

income statement according to the absorption costing concept.

Sales                                                                  $9,500,000.00

Less Cost of Sales                                           ($6,840,000.00)

Gross Profit                                                       $2,660,000.00

Less Expenses

Variable selling and administrative expenses ($1,170,000.00)

Fixed selling and administrative expenses       ($200,000.00)

Net Income                                                          $1,290,000.00

b.

income statement according to the variable costing concept

Sales                                                                  $9,500,000.00

Less Cost of Sales                                           ($6,270,000.00)

Contribution                                                      $3,230,000.00

Less Expenses

Fixed factory overhead                                      ($660,000.00)

Variable selling and administrative expenses ($1,170,000.00)

Fixed selling and administrative expenses       ($200,000.00)

Net Income                                                          $1,200,000.00

c.

The difference is due to fixed cost included in closing inventory under the absorption costing concept.

Explanation:

Production Cost - Absorption Costing

Direct materials                                $4,400,000.00

Direct labor                                       $1,760,000.00

Variable factory overhead                $1,100,000.00

Fixed factory overhead                      $660,000.00

Total                                                  $7,920,000.00

therefore,

Cost of Sales = 38,000 units/ 44,000 units x $7,920,000.00

                      = $6,840,000

Production Cost - Variable Costing

Direct materials                                $4,400,000.00

Direct labor                                       $1,760,000.00

Variable factory overhead                $1,100,000.00

Total                                                  $7,260,000.00

therefore,

Cost of Sales = 38,000 units/ 44,000 units x $7,260,000.00

                      = $6,270,000