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 29,300 hats, of which 27,200 were sold. Operating data for the month are summarized as follows:

Sales			$174,080
Manufacturing costs:
Direct materials	$105,480
Direct labor	29,300
Variable manufacturing cost	11,720
Fixed manufacturing cost	11,720		158,220
Selling and administrative expenses:
Variable	$8,160
Fixed	5,960		14,120

During August, Head Gear Inc. manufactured 25,100 designer hats and sold 27,200 hats. Operating data for August are summarized as follows:

Sales			$174,080
Manufacturing costs:
Direct materials	$90,360
Direct labor	25,100
Variable manufacturing cost	10,040
Fixed manufacturing cost	11,720		137,220
Selling and administrative expenses:
Variable	$8,160
Fixed	5,960		14,120

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:
Cost of goods manufactured	$
Inventory, July 31
Total cost of goods sold
Gross profit		$
Selling and administrative expenses
Income from operations		$

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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	$
Cost of goods manufactured
Total cost of goods sold
Gross profit		$
Selling and administrative expenses
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
Sales		$
Variable cost of goods sold:
Variable cost of goods manufactured	$
Inventory, July 31
Total variable cost of goods sold
Manufacturing margin		$
Variable selling and administrative expenses
Contribution margin		$
Fixed costs:
Fixed manufacturing costs	$
Fixed selling and administrative expenses
Total fixed costs
Income from operations		$

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
Sales		$
Variable cost of goods sold:
Inventory, August 1	$
Variable cost of goods manufactured
Total variable cost of goods sold
Manufacturing margin		$
Variable selling and administrative expenses
Contribution margin		$
Fixed costs:
Fixed manufacturing costs	$
Fixed selling and administrative expenses
Total fixed costs
Income from operations		$

Answer 1

Answer 1-a.

Cost of goods manufactured = $158,220
Number of units produced = 29,300

Cost per unit = Cost of goods manufactured / Number of units produced
Cost per unit = $158,220 / 29,300
Cost per unit = $5.40

Number of units in ending inventory = Number of units produced - Number of units sold
Number of units in ending inventory = 29,300 - 27,200
Number of units in ending inventory = 2,100

Ending Inventory = Number of units in ending inventory * Cost per unit
Ending Inventory = 2,100 * $5.40
Ending Inventory = $11,340

Answer 1-b.

Answer 2-a.

Variable cost of goods manufactured = Direct materials + Direct labor + Variable manufacturing cost
Variable cost of goods manufactured = $105,480 + $29,300 + $11,720
Variable cost of goods manufactured = $146,500

Number of units produced = 29,300

Variable cost per unit = Variable cost of goods manufactured / Number of units produced
Variable cost per unit = $146,500 / 29,300
Variable cost per unit = $5.00

Ending Inventory = Number of units in ending inventory * Variable cost per unit
Ending Inventory = 2,100 * $5.00
Ending Inventory = $10,500

Answer 2-b.

Variable cost of goods manufactured = Direct materials + Direct labor + Variable manufacturing cost
Variable cost of goods manufactured = $90,360 + $25,100 + $10,040
Variable cost of goods manufactured = $125,500