In: Accounting
Absorption and Variable Costing Income Statements for Two Months and Analysis
During the first month of operations ended July 31, Head Gear Inc. manufactured 32,600 hats, of which 30,600 were sold. Operating data for the month are summarized as follows:
Sales | $201,960 | |||
Manufacturing costs: | ||||
Direct materials | $123,880 | |||
Direct labor | 32,600 | |||
Variable manufacturing cost | 16,300 | |||
Fixed manufacturing cost | 13,040 | 185,820 | ||
Selling and administrative expenses: | ||||
Variable | $9,180 | |||
Fixed | 6,700 | 15,880 |
During August, Head Gear Inc. manufactured 28,600 designer hats and sold 30,600 hats. Operating data for August are summarized as follows:
Sales | $201,960 | |||
Manufacturing costs: | ||||
Direct materials | $108,680 | |||
Direct labor | 28,600 | |||
Variable manufacturing cost | 14,300 | |||
Fixed manufacturing cost | 13,040 | 164,620 | ||
Selling and administrative expenses: | ||||
Variable | $9,180 | |||
Fixed | 6,700 | 15,880 |
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 | $ |
Feedback
1a. & b. Sales - (cost of goods manufactured - ending
inventory*) = Gross profit; gross profit - selling and
administrative expenses = income from operations
*(Manufactured Units - Sold units) x (total manufacturing
costs/manufactured units)
a & b. Sales - variable cost of goods sold* = Manufacturing
margin; Manufacturing margin - variable selling and administrative
expenses = Contribution margin; Contribution margin - (fixed
manufacturing costs + fixed selling and administrative expenses) =
income from operations
*Variable cost of goods sold = Variable cost of goods manufactured
- [(Manufactured Units - Sold units) x (variable manufacturing
costs/manufactured units)]
Learning Objective 1 and Learning Objective 2.
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 | $ |
Feedback
Learning Objective 1 and Learning Objective 2.
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 | $ |
Feedback
2a. & b. Sales - (cost of goods manufactured - ending
inventory*) = Gross profit; gross profit - selling and
administrative expenses = income from operations
*(Manufactured Units - Sold units) x (total manufacturing
costs/manufactured units)
a & b. Sales - variable cost of goods sold* = Manufacturing
margin; Manufacturing margin - variable selling and administrative
expenses = Contribution margin; Contribution margin - (fixed
manufacturing costs + fixed selling and administrative expenses) =
income from operations
*Variable cost of goods sold = Variable cost of goods manufactured
- [(Manufactured Units - Sold units) x (variable manufacturing
costs/manufactured units)]
Learning Objective 1 and Learning Objective 2.
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 | $ |
Feedback
Learning Objective 1 and Learning Objective 2.
3a. For July, income from operations reported under variable costing is less than absorption costing due to part of fixed 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 income from operations as due to changes in:
costs.
prices.
sales volume.
"sales volume", "prices" and "costs" are correct.
None of these choices is correct.
The correct answer is:
d
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 equally profitable in July and in August under the variable costing concept. The difference in income reported under the absorption costing concept is due to allocating fixed manufacturing costs to the July 31 ending inventory .
Feedback
3a. Review the effects on income from operations 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 income from operations.
Learning Objective 1 and Learning Objective 2.
Feedback
Partially correct
Requirement | |||
1a | Income statement for July using the absorption costing concept | ||
Head Gear Inc. | |||
Absorption costing income statement | |||
For the month ended July 31 | |||
Sales | $201,960 | ||
Cost of Goods sold: | |||
Cost of goods manufactured | $185,820 | ||
Inventory July, 31 | $11,400 | ||
Total cost of goods sold | $174,420 | ||
Gross Profit | $27,540 | ||
Selling and administrative expenses | $15,880 | ||
Income from Operation | $11,660 | ||
Inventory July 31 | |||
Cost of goods manufactured | $185,820 | ||
Units manufactured | 32600 | ||
per unit cost | $5.70 | ||
Cost of ending inventory (2000 units x 5.70) | $11,400.00 | ||
1b | Income statement for August using the absorption costing concept | ||
Head Gear Inc. | |||
Absorption costing income statement | |||
For the month ended August 31 | |||
Sales | $201,960 | ||
Cost of Goods sold: | |||
Inventory August 1 | $11,400 | ||
Cost of goods manufactured | $164,620 | ||
Total cost of goods sold | $176,020 | ||
Gross Profit | $25,940 | ||
Selling and administrative expenses | $15,880 | ||
Income from Operation | $10,060 | ||
2a | Income statement for July using the variable costing concept | ||
Head Gear Inc. | |||
Variable costing income statement | |||
For the month ended July 31 | |||
Sales | $201,960 | ||
Variable cost of goods sold: | |||
Variable cost of goods manufactured | $172,780 | ||
Inventory July, 31 | $10,600 | ||
Total variable cost of goods manufactured | $162,180 | ||
Manufacturing Margin | $39,780 | ||
Variable selling and administrative expenses | $9,180 | ||
Contribution Margin | $30,600 | ||
Fixed costs: | |||
Fixed manufacturing cost | $13,040 | ||
Fixed selling and administrative expenses | $6,700 | ||
Total fixed cost | $19,740 | ||
Income from operations | $10,860 | ||
Inventory July 31 | |||
Variable Cost of goods manufactured | $172,780 | ||
Units manufactured | 32600 | ||
per unit cost | $5.30 | ||
Cost of ending inventory (2000 units x 5.30) | $10,600.00 | ||
2b | Income statement for August using the variable costing concept | ||
Head Gear Inc. | |||
Variable costing income statement | |||
For the month ended August 31 | |||
Sales | $201,960 | ||
Variable cost of goods sold: | |||
Inventory August, 1 | $10,600 | ||
Variable cost of goods manufactured | $151,580 | ||
Total variable cost of goods manufactured | $162,180 | ||
Manufacturing Margin | $39,780 | ||
Variable selling and administrative expenses | $9,180 | ||
Contribution Margin | $30,600 | ||
Fixed costs: | |||
Fixed manufacturing cost | $13,040 | ||
Fixed selling and administrative expenses | $6,700 | ||
Total fixed cost | $19,740 | ||
Income from operations | $10,860 |