Absorption and Variable Costing Income Statements for Two Months and Analysis

During the first month of operations ended July 31, Head Gear Inc. manufactured 22,800 hats, of which 21,200 were sold. Operating data for the month are summarized as follows:

Sales			$156,880
Manufacturing costs:
Direct materials	$95,760
Direct labor	25,080
Variable manufacturing cost	11,400
Fixed manufacturing cost	9,120		141,360
Selling and administrative expenses:
Variable	$8,480
Fixed	6,190		14,670

During August, Head Gear Inc. manufactured 19,600 hats and sold 21,200 hats. Operating data for August are summarized as follows:

Sales			$156,880
Manufacturing costs:
Direct materials	$82,320
Direct labor	21,560
Variable manufacturing cost	9,800
Fixed manufacturing cost	9,120		122,800
Selling and administrative expenses:
Variable	$8,480
Fixed	6,190		14,670

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
Total cost of goods sold
Gross profit		$
Selling and administrative expenses
Operating income		$

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1a. Sales - (cost of goods manufactured - ending inventory*) = Gross profit; gross profit - selling and administrative expenses = operating income *(Manufactured Units - Sold units) x (total manufacturing costs/manufactured units)

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
Total cost of goods sold
Gross profit		$
Selling and administrative expenses
Operating income		$

Feedback

1b. Sales - (cost of goods manufactured - ending inventory*) = Gross profit; gross profit - selling and administrative expenses = operating income *(Manufactured Units - Sold units) x (total manufacturing costs/manufactured units)

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

Head Gear Inc.
Variable Costing Income Statement
For the Month Ended July 31
Sales		$
Variable cost of goods sold:
Variable cost of goods manufactured	$
Inventory, July 31
Total variable cost of goods sold
Manufacturing margin		$
Variable selling and administrative expenses
Contribution margin		$
Fixed costs:
Fixed manufacturing costs	$
Fixed selling and administrative expenses
Total fixed costs
Operating income		$

Feedback

Partially correct

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

Head Gear Inc.
Variable Costing Income Statement
For the Month Ended August 31
Sales		$
Variable cost of goods sold:
Inventory, August 1	$
Variable cost of goods manufactured
Total variable cost of goods sold
Manufacturing margin		$
Variable selling and administrative expenses
Contribution margin		$
Fixed costs:
Fixed manufacturing costs	$
Fixed selling and administrative expenses
Total fixed costs
Operating income		$