Question

During the first month of operations ended May 31, Big Sky Creations Company produced 55,500 designer cowboy boots, of which 51,350 were sold. Operating data for the month are summarized as follows:

1	Sales		$924,300.00
2	Manufacturing costs:
3	Direct materials	$416,250.00
4	Direct labor	111,000.00
5	Variable manufacturing cost	55,500.00
6	Fixed manufacturing cost	55,500.00	638,250.00
7	Selling and administrative expenses:
8	Variable	$30,810.00
9	Fixed	25,675.00	56,485.00

During June, Big Sky Creations produced 47,200 designer cowboy boots and sold 51,350 cowboy boots. Operating data for June are summarized as follows:

1	Sales		$924,300.00
2	Manufacturing costs:
3	Direct materials	$354,000.00
4	Direct labor	94,400.00
5	Variable manufacturing cost	47,200.00
6	Fixed manufacturing cost	55,500.00	551,100.00
7	Selling and administrative expenses:
8	Variable	$30,810.00
9	Fixed	25,675.00	56,485.00

	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.*
3a.	Explain the reason for the differences in operating income in (1) and (2) for May.
3b.	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. * Be sure to complete the statement heading. Refer to the list of Labels and Amount Descriptions provided for the exact wording of the answer choices for text entries. A colon (:) will automatically appear if it is required. Enter amounts as positive numbers unless the amount is a calculation that results in a negative amount. For example: Net loss should be negative.

Answer 1

	Variable costing	Absorption Costing
Direct Material (416250/55500)	$7.50	$7.50
Direct Labor (111000/55500)	$2.00	$2.00
Variable overhead	$1.00	$1.00
Fixed overhead		$1.00	(55500/55500)
Product cost	$10.50	$11.50
Absorption costing
For the month ended May & June		May	June
Sales		$924,300	924300
Less: Cost of good sold		$590,525	$590,525
		(11.5*51350)	(11.5*51350)
Gross profit		$333,775	$333,775
Variable Selling & adm expenses		30810	30810
Fixed Selling & adm expenses		25675	25675
Net operating income		$277,290	$277,290
ans 2
Variable Costing
For the month ended May & June		May	June
Sales		$924,300	$924,300
Less: Variable Cost of good sold (51350*10.5)		$539,175	$539,175
Variable Selling & adm expenses		30810	30810
Contribution margin		$354,315	$354,315
Fixed manufacturing ovrhead		55500	55500
Fixed Selling & adm expenses		25675	25675
Net operating income		$273,140	$273,140
ans 3a and 3b Reconcile		May	June
Income under Variable costing		$273,140	$273,140
Less: Fixed manufacturing overhead in beginning inventory			4150
Add: Fixed manufacturing overhead deferred in ending inventory		4150
		(55500-51350)*1	(55500-51350)*1
Income under absorption costing		$277,290	$277,290
ans 4
They were equal as they sold equal units