Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 32,700 hats, of which 30,400 were sold. Operating data for the month are summarized as follows: Sales $243,200 Manufacturing costs: Direct materials $150,420 Direct labor 39,240 19,620 Variable manufacturing cost Fixed manufacturing cost 16,350 225,630 Selling and administrative expenses: Variable $12,160 Fixed 8,880 21,040 During August, Head Gear Inc. manufactured 28,100 hats and sold 30,400 hats. Operating data for August are summarized as follows: Sales $243,200 Manufacturing costs: Direct materials $129,260 Direct labor 33,720 16,860 Variable manufacturing cost Fixed manufacturing cost 16,350 196,190 Selling and administrative expenses: Variable $12,160 Fixed 8,880 21,040 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 243,200 Cost of goods sold: Cost of goods manufactured 225,630 Inventory, July 31 Total cost of goods sold Gross profit $ Selling and administrative expenses Operating income 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: costing is less than costing due to part of 3a. For July, operating income reported under 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: 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