Absorption and Variable Costing Income Statements for Two Months and Analysis

During the first month of operations ended July 31, Head Gear Inc. manufactured 24,700 hats, of which 23,200 were sold. Operating data for the month are summarized as follows:

Sales $199,520

Manufacturing costs:

Direct materials $121,030

Direct labor 32,110

Variable manufacturing cost 14,820

Fixed manufacturing cost 12,350 180,310

Selling and administrative expenses:

Variable $9,280

Fixed 6,770 16,050

During August, Head Gear Inc. manufactured 21,700 designer hats and sold 23,200 hats. Operating data for August are summarized as follows:

Sales $199,520

Manufacturing costs:

Direct materials $106,330

Direct labor 28,210

Variable manufacturing cost 13,020

Fixed manufacturing cost 12,350 159,910

Selling and administrative expenses:

Variable $9,280

Fixed 6,770 16,050

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

$

Cost of goods sold:

$

$

$

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

$

Cost of goods sold:

$

$

$

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

$

Variable cost of goods sold:

$

$

$

Fixed costs:

$

$

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

$

Variable cost of goods sold:

$

$

$

Fixed costs:

$

$

3a. For July, income from operations 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 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:

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 income reported under the absorption costing concept is due to allocating

to the

.

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