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 (3,500 units) $2,345,000 Production costs (4,000 units): Direct materials $1,152,400 Direct labor 495,600 Variable factory overhead 80,800 Fixed factory overhead 126,800 1,855,600 Selling and administrative expenses: Variable selling and administrative expenses $57,500 Fixed selling and administrative expenses 24,100 81,600 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 $ fill in the blank 3 fill in the blank 5 $ fill in the blank 7 fill in the blank 9 $ fill in the blank 11 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 $ fill in the blank 13 fill in the blank 15 $ fill in the blank 17 fill in the blank 19 $ fill in the blank 21 Fixed costs: $ fill in the blank 23 fill in the blank 25 fill in the blank 27 $ fill in the blank 29 c. What is the reason for the difference in the amount of Operating income reported in (a) and (b)? Under the method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under , 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 income statement will have a higher Operating income than will the variable costing income statement.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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 (3,500 units) | $2,345,000 | |||
| Production costs (4,000 units): | ||||
| Direct materials | $1,152,400 | |||
| Direct labor | 495,600 | |||
| Variable factory overhead | 80,800 | |||
| Fixed factory overhead | 126,800 | 1,855,600 | ||
| Selling and administrative expenses: | ||||
| Variable selling and administrative expenses | $57,500 | |||
| Fixed selling and administrative expenses | 24,100 | 81,600 |
This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.
a. Prepare an income statement according to the absorption costing concept.
| Gallatin County Motors Inc. | ||
| Absorption Costing Income Statement | ||
| For the Month Ended July 31 | ||
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$ fill in the blank 3 | |
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fill in the blank 5 | |
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$ fill in the blank 7 | |
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fill in the blank 9 | |
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$ fill in the blank 11 |
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 | |||||
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$ fill in the blank 13 | ||||
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fill in the blank 15 | ||||
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$ fill in the blank 17 | ||||
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fill in the blank 19 | ||||
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$ fill in the blank 21 | ||||
| Fixed costs: | |||||
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$ fill in the blank 23 | ||||
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fill in the blank 25 | ||||
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fill in the blank 27 | ||||
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$ fill in the blank 29 |
c. What is the reason for the difference in the amount of Operating income reported in (a) and (b)?
Under the
method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under
, 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
income statement will have a higher Operating income than will the variable costing income statement.
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