During the first month of operations ended July 31, 2016, Head Gear Inc. manufactured 6,400 hats, of which 5,200 were sold. Operating data for the month are summarized as follows:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $104,000
Manufacturing costs:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$47,360
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,400
Variable manufacturing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12,160
Fixed manufacturing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,360. . . . . . . . . . . . 97,280
Selling and administrative expenses:
Variable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,920
Fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5,200. . . . . . . . . . . . 16,120
During August Head Gear Inc. manufactured 4,000 hats and sold 5,200 hats. Operating data for August are summarized as follows:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$104,000
Manufacturing costs:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$29,600
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14,000
Variable manufacturing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,600
Fixed manufacturing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,360. . . . . . . . .66,560
Selling and administrative expenses:
Variable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,920
Fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5,200. . . . . . . . .16,120
Instructions
1. Using the absorption costing concept, prepare income statements for (a) July and (b) August.
2. Using the variable costing concept, prepare income statements for (a) July and (b) August.
3. a. Explain the reason for the differences in the amount of income from operations in (1) And
(2) For July.
b. Explain the reason for the differences in the amount of income from operations in (1) and (2) for August.
4. Based on your answers to (1) And (2) Did Head Gear Inc. operate more profitably in July or in August? Explain.