Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 28,500 hats, of which 27,100 were sold. Operating data for the month are summarized as follows: Sales $200,540 Manufacturing costs: Direct materials $119,700 Direct labor 31,350 Variable manufacturing cost 14,250 Fixed manufacturing cost 11,400 176,700 Selling and administrative expenses: Variable $10,840 Fixed 7,910 18,750 During August, Head Gear Inc. manufactured 25,700 hats and sold 27,100 hats. Operating data for August are summarized as follows: Sales $200,540 Manufacturing costs: Direct materials $107,940 Direct labor 28,270 Variable manufacturing cost 12,850 Fixed manufacturing cost 11,400 160,460 Selling and administrative expenses: Variable $10,840 Fixed 7,910 18,750 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 Cost of goods sold: U A 1b. Prepare income statement for August using the absorption costing concept. Head Gear Inc. Absorption Costing Income Statement For the Month Ended August 31 Cost of goods sold: 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 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: 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