Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc manufactured 21,800 hats, of which 20,700 were sold Operating data for the month are summarized as follows Sales $198,720 Manufacturing costs Direct materials $119,900 Direct labor 30,520 Variable manufacturing cost 15,260 Fixed manufacturing cost 13,080 178,760 Selling and administrative expenses Variable $10,350 Fixed 7,560 17,910 During August, Head Gear Inc manufactured 19,600 hats and sold 20,700 hats Operating data for August are summarized as follows Sales $198,720 Manufacturing costs Direct materials $107,800 Direct labor 27,440 Variable manufacturing cost 13,720 Fixed manufacturing cost 13,080 162,040 Selling and administrative expenses Variable $10,350 Fixed 7,560 17,910 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 costs prices sales volume sales volume , prices and costs are correct 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

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Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 21,800

Absorption and Variable Costing Income Statements for Two Months and Analysis

During the first month of operations ended July 31, Head Gear Inc. manufactured 21,800 hats, of which 20,700 were sold. Operating data for the month are summarized as follows:

Sales		$198,720
Manufacturing costs:
Direct materials	$119,900
Direct labor	30,520
Variable manufacturing cost	15,260
Fixed manufacturing cost	13,080	178,760
Selling and administrative expenses:
Variable	$10,350
Fixed	7,560	17,910

During August, Head Gear Inc. manufactured 19,600 hats and sold 20,700 hats. Operating data for August are summarized as follows:

Sales		$198,720
Manufacturing costs:
Direct materials	$107,800
Direct labor	27,440
Variable manufacturing cost	13,720
Fixed manufacturing cost	13,080	162,040
Selling and administrative expenses:
Variable	$10,350
Fixed	7,560	17,910

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:

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