During the first month of operations ended May $31,$ Big Sky Creations Company produced $40,000$ designer cowboy boots, of which $36,000$ were sold. Operating data for the month are summarized as follows:

$1$

Sales

$$4,500,000\mathrm{.}00$

$2$

Manufacturing costs:

$3$

Direct materials

$$960,000\mathrm{.}00$

$4$

Direct labor

$2,000,000\mathrm{.}00$

$5$

Variable manufacturing cost

$520,000\mathrm{.}00$

$6$

Fixed manufacturing cost

$120,000\mathrm{.}00$

$3,600,000\mathrm{.}00$

$7$

Selling and administrative expenses:

$8$

Variable

$$72,000\mathrm{.}00$

$9$

Fixed

$80,000\mathrm{.}00$

$152,000\mathrm{.}00$

During June, Big Sky Creations produced $32,000$ designer cowboy boots and sold $36,000$ cowboy boots. Operating data for June are summarized as follows:

$1$

Sales

$$4,500,000\mathrm{.}00$

$2$

Manufacturing costs:

$3$

Direct materials

$$768,000\mathrm{.}00$

$4$

Direct labor

$1,600,000\mathrm{.}00$

$5$

Variable manufacturing cost

$416,000\mathrm{.}00$

$6$

Fixed manufacturing cost

$120,000\mathrm{.}00$

$2,904,000\mathrm{.}00$

$7$

Selling and administrative expenses:

$8$

Variable

$$72,000\mathrm{.}00$

$9$

Fixed

$80,000\mathrm{.}00$

$152,000\mathrm{.}00$

Required:

$1.$ Using the absorption costing concept, prepare income statements for $($a$)$ May and $($b$)$ June.

$2.$ Using the variable costing concept, prepare income statements for $($a$)$ May and $($b$)$ June.

$3$a$.$ Explain the reason for the differences in operating income in $(1)$ and $(2)$ for May.

$3$b$.$ Explain the reason for the differences in operating income in $(1)$ and $(2)$ for June.

$4.$ Based on your answers to $(1)$ and $(2),$ did Big Sky Creations Company operate more profitably in May or in June? Explain.

$1$a$.$ Using the absorption costing concept, prepare income statements for May.

Income Statement Instructions

Big Sky Creations Company

Absorption Costing Income Statement

$($Label$)$

$1$

Sales

$$4,500,000\mathrm{.}00$

$2$

Total cost of goods sold:

$3$

$4$

$5$

$6$

$7$

$8$

$1$b$.$ Using the absorption costing concept, prepare income statements for June.

Income Statement Instructions

Big Sky Creations Company

Absorption Costing Income Statement

$($Label$)$

$1$

$2$

$($Label$)$

$3$

$4$

$5$

$6$

$7$

$8$

$2$a$.$ Using the variable costing concept, prepare income statements for May.

Income Statement Instructions

Big Sky Creations Company

Variable Costing Income Statement

$($Label$)$

$1$

$2$

$($Label$)$

$3$

$4$

$5$

$6$

$7$

$8$

$9$

$($Label$)$

$10$

$11$

$12$

$13$

$2$b$.$ Using the variable costing concept, prepare income statements for June.

Income Statement Instructions

Big Sky Creations Company

Variable Costing Income Statement

$($Label$)$

$1$

$2$

$($Label$)$

$3$

$4$

$5$

$6$

$7$

$8$

$9$

$($Label$)$

$10$

$11$

$12$

$13$

$3$a$.$ Explain the reason for the differences in operating income in $(1)$ and $(2)$ for May.

For May, operating income reported under costing exceeds that reported under costing due to part of manufacturing costs that are expensed on the costing income statement, but not on the costing income statement.

$3$b$.$ Explain the reason for the differences in operating income in $(1)$ and $(2)$ for June.

For June, operating income reported under costing is less than that reported under costing due to part of manufacturing costs from May that are expensed on the costing income statement, but not on the costing income statement.

$4.$ Based on your answers to $(1)$ and $(2),$ did Big Sky Creations Company operate more profitably in May or in June? Explain.

Big Sky Creations Company was under the variable costing concept. The difference in operating income reported under the absorption costing concept is due to allocating to the $.$