Answer:
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.
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.
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