Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc manufactured 24,700 hats, of which 23,200 were sold Operating data for the month are summarized as follows Sales $213,440 Manufacturing costs Direct materials $128,440 Direct labor 34,580 Variable manufacturing cost 14,820 Fixed manufacturing cost 14,820 192,660 Selling and administrative expenses Variable $11,600 Fixed 8,470 20,070 During August, Head Gear Inc manufactured 21,700 designer hats and sold 23,200 hats Operating data for August are summarized as follows Sales $213,440 Manufacturing costs Direct materials $112,840 Direct labor 30,380 Variable manufacturing cost 13,020 Fixed manufacturing cost 14,820 171,060 Selling and administrative expenses Variable $11,600 Fixed 8,470 20,070 Required 1a Prepare an income statement for July using the absorption costing concept Enter all amounts as positive numbers Head Gear Inc Absorption Costing Income Statement For the Month Ended July 31 $ Cost of goods sold $ $ $ 1b Prepare an income statement for August using the absorption costing concept Enter all amounts as positive numbers Head Gear Inc Absorption Costing Income Statement For the Month Ended August 31 $ Cost of goods sold $ $ $ 2a Prepare an income statement for July using the variable costing concept Enter all amounts as positive numbers Head Gear Inc Variable Costing Income Statement For the Month Ended July 31 $ Variable cost of goods sold $ $ $ Fixed costs $ $ 2b Prepare an income statement for August using the variable costing concept Enter all amounts as positive numbers Head Gear Inc Variable Costing Income Statement For the Month Ended August 31 $ Variable cost of goods sold $ $ $ Fixed costs $ $ 3a For July, income from operations reported under costing is 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 income from operations as due to changes in costs prices sales volume sales volume , prices and costs are correct 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 income reported under the absorption costing concept is due to allocating to the

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Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 24,700

Absorption and Variable Costing Income Statements for Two Months and Analysis

During the first month of operations ended July 31, Head Gear Inc. manufactured 24,700 hats, of which 23,200 were sold. Operating data for the month are summarized as follows:

Sales		$213,440
Manufacturing costs:
Direct materials	$128,440
Direct labor	34,580
Variable manufacturing cost	14,820
Fixed manufacturing cost	14,820	192,660
Selling and administrative expenses:
Variable	$11,600
Fixed	8,470	20,070

During August, Head Gear Inc. manufactured 21,700 designer hats and sold 23,200 hats. Operating data for August are summarized as follows:

Sales		$213,440
Manufacturing costs:
Direct materials	$112,840
Direct labor	30,380
Variable manufacturing cost	13,020
Fixed manufacturing cost	14,820	171,060
Selling and administrative expenses:
Variable	$11,600
Fixed	8,470	20,070

Required:

1a. Prepare an income statement for July using the absorption costing concept. Enter all amounts as positive numbers.

Head Gear Inc.
Absorption Costing Income Statement
For the Month Ended July 31
		$
Cost of goods sold:
	$


		$

		$

1b. Prepare an income statement for August using the absorption costing concept. Enter all amounts as positive numbers.

Head Gear Inc.
Absorption Costing Income Statement
For the Month Ended August 31
		$
Cost of goods sold:
	$


		$

		$

2a. Prepare an income statement for July using the variable costing concept. Enter all amounts as positive numbers.

Head Gear Inc.
Variable Costing Income Statement
For the Month Ended July 31
		$
Variable cost of goods sold:
	$


		$

		$
Fixed costs:
	$


		$

2b. Prepare an income statement for August using the variable costing concept. Enter all amounts as positive numbers.

Head Gear Inc.
Variable Costing Income Statement
For the Month Ended August 31
		$
Variable cost of goods sold:
	$


		$

		$
Fixed costs:
	$


		$

3a. For July, income from operations reported under costing is 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 income from operations as due to changes in:

costs.
prices.
sales volume.
"sales volume", "prices" and "costs" are correct.
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 income reported under the absorption costing concept is due to allocating to the .