Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 33,600 hats, of which 31,600 were sold. Operating data for the month are summarized as follows: Sales $252,800 Manufacturing costs: Direct materials $154,560 Direct labor 40,320 20,160 Variable manufacturing cost Fixed manufacturing cost 16,800 231,840 Selling and administrative expenses: Variable $12,640 Fixed 9,230 21,870 During August, Head Gear Inc. manufactured 29,600 designer hats and sold 31,600 hats. Operating data for August are summarized as follows: Sales $252,800 Manufacturing costs: Direct materials $136,160 Direct labor 35,520 Variable manufacturing cost 17,760 Fixed manufacturing cost 16,800 206,240 Selling and administrative expenses: Variable $12,640 Fixed 9,230 21,870 Required: 1a. Prepare an income statement for July using the absorption costing concept. Enter all amounts as positive numbers. Head Gear Inc. Absorption Costing Income Statement For the Month Ended July 31 Sales 252,800 Cost of goods sold: Cost of goods manufactured $ Inventory, July 31 Total cost of goods sold Gross profit Selling and administrative expenses Income from operations Feedback 1b. Prepare an income statement for August using the absorption costing concept. Enter all amounts as positive numbers. Head Gear Inc. Absorption Costing Income Statement For the Month Ended August 31 Sales 252,800 Cost of goods sold: Inventory, August 1 Cost of goods manufactured Total cost of goods sold Gross profit Selling and administrative expenses Income from operations 2a. Prepare an income statement for July using the variable costing concept. Enter all amounts as positive numbers. Head Gear Inc. Variable Costing Income Statement For the Month Ended July 31 Sales 252,800 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 Income from operations Feedback 2b. Prepare an income statement for August using the variable costing concept. Enter all amounts as positive numbers. Head Gear Inc. Variable Costing Income Statement For the Month Ended August 31 Sales 252,800 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 Income from operations Feedback 3a. For July, income from operations reported under variable costing is less than absorption costing due to part of fixed 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 income from operations 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: d 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 equally profitable in July and in August under the variable costing concept. The difference in income reported under the absorption costing concept is due to allocating fixed manufacturing costs to the July 31 ending inventory