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 23,000 were sold. Operating data for the month are summarized as follows: Sales $161,000 Manufacturing costs: Direct materials $98,800 Direct labor 27,170 Variable manufacturing cost 12,350 Fixed manufacturing cost 9,880 148,200 Selling and administrative expenses: Variable $9,200 Fixed 6,720 15,920 During August, Head Gear Inc. manufactured 21,300 hats and sold 23,000 hats. Operating data for August are summarized as follows: Sales $161,000 Manufacturing costs: Direct materials $85,200 Direct labor 23,430 Variable manufacturing cost 10,650 9,880 129,160 Fixed manufacturing cost Selling and administrative expenses: Variable $9,200 Fixed 6,720 15,920 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 161,000 Cost of goods sold: Cost of goods manufactured 148,200 Inventory, July 31 10,200 Total cost of goods sold 138,000 Gross profit $ 23,000 Selling and administrative expenses 15,920 Operating income 7,080 Feedback Check My Work 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 $ 161,000 Cost of goods sold: Inventory, August 1 - 10,200 Cost of goods manufactured 129,160 Total cost of goods sold 139,360 Gross profit $ 21,640 Selling and administrative expenses 15,920 Operating income 5,720 Feedback Check My Work 1b. Sales - cost of goods manufactured - ending inventory*) = Gross profit; gross profit - selling and administrative expenses = operat *(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 161,000 Variable cost of goods sold: Cost of goods sold X Fixed costs: Fixed manufacturing costs 9,200 X Fixed selling and administrative expenses 23,000 X Total fixed costs 12,350 x Operating income 6,400 Feedback Check My Work 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 Variable cost of goods sold: od Fixed costs: $ Feedback Check My Work 2b. Sales - variable cost of goods sold* = Manufacturing margin; Manufacturing margin - variable selling and administrative expenses = Contribution margin; Contribution margin - (fixed manufacturing costs + fixed selling and administrative expenses) = operating income *Variable cost of goods sold = Variable cost of goods manufactured - [(Manufactured Units - Sold units) x (variable manufacturing costs/ manufactured units)] 3a. For July, operating income reported under costing is less than costing due to part of manufacturing costs that are expe 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 change 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
