18. PR.07.03B.ALGO (Algorithmic) Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 27,200 hats, of which 25,300 were sold. Operating data for the month are summarized as follows: Sales $237,820 Manufacturing costs: Direct materials $146,880 Direct labor 38,080 Variable manufacturing cost 19,040 Fixed manufacturing cost 16,320 220,320 Selling and administrative expenses: Variable $12,650 Fixed 9,230 21,880 During August, Head Gear Inc. manufactured 23,400 hats and sold 25,300 hats. Operating data for August are summarized as follows: Sales $237,820 $126,360 32,760 Manufacturing costs: Direct materials Direct labor Variable manufacturing cost Fixed manufacturing cost Selling and administrative expenses: Variable 16,380 16,320 191,820 $12,650 9,230 Fixed 21,880 Fixed 9,230 21,880 Required: 1a. Prepare income statement for July using the absorption costing concept. Head Gear Inc. Absorption Costing Income Statement For the Month Ended July 31 Sales $ Cost of goods sold: Cost of goods manufactured $ Inventory, July 31 Inventory, August 1 Gross profit $ Selling and administrative expenses Operating income $ 1b. Prepare income statement for August using the absorption costing concept. Head Gear Inc. Absorption Costing Income Statement For the Month Ended August 31 Sales $ Cost of goods sold: Inventory, August 1 $ Cost of goods manufactured Inventory, August 1 $ Cost of goods sold: Inventory, August 1 $ Cost of goods manufactured Inventory, August 1 $ 2a. Prepare income statement for July using the variable costing concept. Head Gear Inc. Variable Costing Income Statement For the Month Ended July 31 Variable cost of goods sold: $ Fixed costs: $ 2b. Prepare income statement for August using the variable costing concept. Head Gear Inc. Variable Costing Income Statement For the Month Ended August 31 Variable cost of goods sold: Fixed costs: $ 3a. For July, operating income reported under costing less than costing due to part of manufacturing costs that are expensed. 3b. When large changes in inventory levels occur from one period to the next, it is possible for management to misinterpret such increases (or decreases) in operating income as due to changes in: a. costs b. prices. c. sales volume. d. "sales volume", "prices" and "costs" are correct. e. None of these choices is correct. 3b. When large changes in inventory levels occur from one period to the next, it is possible for management to misinterpret such increases (or decreases) in operating income as due to changes in: a. costs. b. prices. c. sales volume. d. "sales volume", "prices" and "costs" are correct. e. None of these choices is correct. The correct answer is: 4. Based on your answers to (1) and (2), did Head Gear Inc. operate more profitably in July or in August? Explain. Head Gear Inc. was under the variable costing concept. The difference in operating income reported under the absorption costing concept is due to allocating to the