Absorption and Variable Costing Income Statements for Two Months and Analysis

During the first month of operations ended July 31, Head Gear Inc. manufactured 29,300 hats, of which 27,200 were sold. Operating data for the month are summarized as follows:

Sales			$217,600
Manufacturing costs:
Direct materials	$134,780
Direct labor	35,160
Variable manufacturing cost	17,580
Fixed manufacturing cost	14,650		202,170
Selling and administrative expenses:
Variable	$10,880
Fixed	7,940		18,820

During August, Head Gear Inc. manufactured 25,100 hats and sold 27,200 hats. Operating data for August are summarized as follows:

Sales			$217,600
Manufacturing costs:
Direct materials	$115,460
Direct labor	30,120
Variable manufacturing cost	15,060
Fixed manufacturing cost	14,650		175,290
Selling and administrative expenses:
Variable	$10,880
Fixed	7,940		18,820

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		$fill in the blank cd6d51030fce04e_2
Cost of goods sold:
Cost of goods manufactured	$fill in the blank cd6d51030fce04e_4
Inventory, July 31	fill in the blank cd6d51030fce04e_6
Total cost of goods sold		fill in the blank cd6d51030fce04e_8
Gross profit		$fill in the blank cd6d51030fce04e_10
Selling and administrative expenses		fill in the blank cd6d51030fce04e_12
Operating income		$fill in the blank cd6d51030fce04e_14

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1b. Prepare income statement for August using the absorption costing concept.

Head Gear Inc.
Absorption Costing Income Statement
For the Month Ended August 31
		$fill in the blank 505faafd505df86_2
Cost of goods sold:
	$fill in the blank 505faafd505df86_4
	fill in the blank 505faafd505df86_6
		fill in the blank 505faafd505df86_8
		$fill in the blank 505faafd505df86_10
		fill in the blank 505faafd505df86_12
		$fill in the blank 505faafd505df86_14

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2a. Prepare income statement for July using the variable costing concept.

Head Gear Inc.
Variable Costing Income Statement
For the Month Ended July 31
		$fill in the blank fd9bd6fd5fd7040_2
Variable cost of goods sold:
	$fill in the blank fd9bd6fd5fd7040_4
	fill in the blank fd9bd6fd5fd7040_6
		fill in the blank fd9bd6fd5fd7040_8
		$fill in the blank fd9bd6fd5fd7040_10
		fill in the blank fd9bd6fd5fd7040_12
		$fill in the blank fd9bd6fd5fd7040_14
Fixed costs:
	$fill in the blank fd9bd6fd5fd7040_16
	fill in the blank fd9bd6fd5fd7040_18
		fill in the blank fd9bd6fd5fd7040_20
		$fill in the blank fd9bd6fd5fd7040_22

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2b. Prepare income statement for August using the variable costing concept.

Head Gear Inc.
Variable Costing Income Statement
For the Month Ended August 31
		$fill in the blank 80a33cff405b07f_2
Variable cost of goods sold:
	$fill in the blank 80a33cff405b07f_4
	fill in the blank 80a33cff405b07f_6
		fill in the blank 80a33cff405b07f_8
		$fill in the blank 80a33cff405b07f_10
		fill in the blank 80a33cff405b07f_12
		$fill in the blank 80a33cff405b07f_14
Fixed costs:
	$fill in the blank 80a33cff405b07f_16
	fill in the blank 80a33cff405b07f_18
		fill in the blank 80a33cff405b07f_20
		$fill in the blank 80a33cff405b07f_22

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3a. For July, operating income 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 operating income as due to changes in:

1. costs.
2. prices.
3. sales volume.
4. "sales volume", "prices" and "costs" are correct.
5. 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 .