Question

Absorption and Variable Costing Income Statements for Two Months and Analysis

During the first month of operations ended July 31, Head Gear Inc. manufactured 6,400 hats, of which 5,200 were sold. Operating data for the month are summarized as follows:

Sales			$104,000
Manufacturing costs:
Direct materials	$47,360
Direct labor	22,400
Variable manufacturing cost	12,160
Fixed manufacturing cost	15,360		97,280
Selling and administrative expenses:
Variable	$10,920
Fixed	5,200		16,120

During August, Head Gear Inc. manufactured 4,000 hats and sold 5,200 hats. Operating data for August are summarized as follows:

Sales			$104,000
Manufacturing costs:
Direct materials	$29,600
Direct labor	14,000
Variable manufacturing cost	7,600
Fixed manufacturing cost	15,360		66,560
Selling and administrative expenses:
Variable	$10,920
Fixed	5,200		16,120

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
Sales		$
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
Sales		$
Cost of goods sold:
Inventory, August 1	$
		$
Income from operations		$

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. Which of the following does not appear as a separate line item on the absorption costing income statement for August?

1. Sales.
2. Income from Operations.
3. Gross Profit.
4. Cost of Goods Sold.
5. Variable selling and administrative expenses.

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  .

Answer 1