Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc, manufactured 33,100 hats, of which 31,400 were sold Operating data for the month are summarized as follows: Sales $282,600 Manufacturing costs Direct materials $168,810 Direct labor 43,030 Variable manufacturing cost 19,860 Fixed manufacturing cost 16,550 243,250 Selling and administrative expenses: Variable $15,700 Fixed 11,460 27,160 During August, Head Gear Inc, manufactured 29,700 hats and sold 31,400 hats. Operating data for August are summarized as follows: Sales $282,600 $151,470 38,610 Manufacturing costs: Direct materials Direct labor Variable manufacturing cost Fixed manufacturing cost Selling and administrative expenses: Variable 17,820 16,550 224,450 $15,700 Fixed Im 11,460 27,160 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: 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: 4. Based on your answers to (1) and (2) did Head Gear Inc operate more profitably in July or in August? Explain Head Gear the was under the variable costing concept. The difference in operating income reported under the absorption costing concept is due to allocating to the 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 Cost of goods sold: Cost of goods manufactured Inventory, July 31 Total cost of goods sold Gross profit 100. 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 Sales Cost of goods sold: Inventory, August 1 Cost of goods manufactured Total cost of goods sold Gross profit DOOD Selling and administrative expenses I Operating income 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 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 I Fixed costs: Fixed manufacturing costs Fixed selling and administrative expenses Total fixed costs Operating income
