Absorption and Variable Costing Income Statements for Two Months and Analysis

During the first month of operations ended May 31, 2016, T-shirt Express Company produced 34,400 designer T-shirts, of which 32,300 were sold. Operating data for the month are summarized as follows:

Sales			$213,180
Manufacturing costs:
Direct materials	$130,720
Direct labor	34,400
Variable manufacturing cost	17,200
Fixed manufacturing cost	13,760		196,080
Selling and administrative expenses:
Variable	$9,690
Fixed	7,070		16,760

During June, T-shirt Express Company produced 30,200 designer T-shirts and sold 32,300 T-shirts. Operating data for June are summarized as follows:

Sales			$213,180
Manufacturing costs:
Direct materials	$114,760
Direct labor	30,200
Variable manufacturing cost	15,100
Fixed manufacturing cost	13,760		173,820
Selling and administrative expenses:
Variable	$9,690
Fixed	7,070		16,760

1a. Prepare an income statement for May using the absorption costing concept. Enter all amounts as positive numbers.

T-shirt Express Company
Absorption Costing Income Statement
For the Month Ended May 31, 2016
		$
Cost of goods sold:
	$
		$
		$

1b. Prepare an income statement for June using the absorption costing concept. Enter all amounts as positive numbers.

T-shirt Express Company
Absorption Costing Income Statement
For the Month Ended June 30, 2016
		$
Cost of goods sold:
	$
		$
		$

2a. Prepare an income statement for May using the variable costing concept. Enter all amounts as positive numbers.

T-shirt Express Company
Variable Costing Income Statement
For the Month Ended May 31, 2016
		$
Variable cost of goods sold:
	$
		$
		$
Fixed costs:
	$
		$

2b. Prepare an income statement for June using the variable costing concept. Enter all amounts as positive numbers.

T-shirt Express Company
Variable Costing Income Statement
For the Month Ended June 30, 2016
		$
Variable cost of goods sold:
	$
		$
		$
Fixed costs:
	$
		$

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:

costs.

prices.

sales volume.

"sales volume", "prices" and "costs" are correct.

None of these choices is correct.

The correct answer is: