Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 22,700 hats, of which 21,100 were sold. Operating data for the month are summarized as follows: Sales $156,140 Manufacturing costs: Direct materials $95,340 Direct labor 24,970 11,350 9,080 140,740 Variable manufacturing cost Fixed manufacturing cost Selling and administrative expenses: Variable $8,440 Fixed 6,160 14,600 During August, Head Gear Inc. manufactured 19,500 hats and sold 21,100 hats. Operating data for August are summarized as follows: Sales $156,140 Manufacturing costs: Direct materials $81,900 Direct labor 21,450 9,750 9,080 122,180 Variable manufacturing cost Fixed manufacturing cost Selling and administrative expenses: Variable $8,440 Fixed 6,160 14,600 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 Sales 156,140 Cost of goods sold: Head Gear Inc. Absorption Costing Income Statement For the Month Ended July 31 Sales 156,140 Cost of goods sold: Cost of goods manufactured 140,740 Inventory, July 31 73,760 x Total cost of goods sold $ $ Feedback Check My Work 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: Feedback Check My Work Feedback Check My Work 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: Feedback Check My Work 2b. Prepare income statement for August using the variable costing concept. eBook Show Me How Feedback Check My Work 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: 00 Feedback Check My Work 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. -"-""--"--"----------- Check My Work eBook Show Me How D. Feedback Check My Work 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 Inc. was under the variable costing concept. The difference in operating income reported under the absorption costing concept is due to allocating to the Feedback Check My Work 3a. Review the effects on operating income when the number of units manufactured differs from the number of units sold and how managers should analyze these situations. 3b. Remember that under absorption costing, both variable and fixed selling and administrative costs are combined and then subtracted from gross profit to obtain operating income. 4. Consider what causing the difference in operating income reported under the two methods. There is a need for management to exercise care in interpreting operating income reported under absorption costing when large changes in inventory levels occur. Feedback Check My Work Partially correct Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 22,700 hats, of which 21,100 were sold. Operating data for the month are summarized as follows: Sales $156,140 Manufacturing costs: Direct materials $95,340 Direct labor 24,970 11,350 9,080 140,740 Variable manufacturing cost Fixed manufacturing cost Selling and administrative expenses: Variable $8,440 Fixed 6,160 14,600 During August, Head Gear Inc. manufactured 19,500 hats and sold 21,100 hats. Operating data for August are summarized as follows: Sales $156,140 Manufacturing costs: Direct materials $81,900 Direct labor 21,450 9,750 9,080 122,180 Variable manufacturing cost Fixed manufacturing cost Selling and administrative expenses: Variable $8,440 Fixed 6,160 14,600 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 Sales 156,140 Cost of goods sold: Head Gear Inc. Absorption Costing Income Statement For the Month Ended July 31 Sales 156,140 Cost of goods sold: Cost of goods manufactured 140,740 Inventory, July 31 73,760 x Total cost of goods sold $ $ Feedback Check My Work 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: Feedback Check My Work Feedback Check My Work 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: Feedback Check My Work 2b. Prepare income statement for August using the variable costing concept. eBook Show Me How Feedback Check My Work 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: 00 Feedback Check My Work 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. -"-""--"--"----------- Check My Work eBook Show Me How D. Feedback Check My Work 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 Inc. was under the variable costing concept. The difference in operating income reported under the absorption costing concept is due to allocating to the Feedback Check My Work 3a. Review the effects on operating income when the number of units manufactured differs from the number of units sold and how managers should analyze these situations. 3b. Remember that under absorption costing, both variable and fixed selling and administrative costs are combined and then subtracted from gross profit to obtain operating income. 4. Consider what causing the difference in operating income reported under the two methods. There is a need for management to exercise care in interpreting operating income reported under absorption costing when large changes in inventory levels occur. Feedback Check My Work Partially correct