Question

In: Accounting

Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of...

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

Solutions

Expert Solution

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

Related Solutions

Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of...
Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 21,800 hats, of which 20,700 were sold. Operating data for the month are summarized as follows: Sales $198,720 Manufacturing costs: Direct materials $119,900 Direct labor 30,520 Variable manufacturing cost 15,260 Fixed manufacturing cost 13,080 178,760 Selling and administrative expenses: Variable $10,350 Fixed 7,560 17,910 During August, Head Gear Inc. manufactured 19,600 hats and sold 20,700 hats....
Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of...
Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 21,800 hats, of which 20,700 were sold. Operating data for the month are summarized as follows: Sales $198,720 Manufacturing costs: Direct materials $119,900 Direct labor 30,520 Variable manufacturing cost 15,260 Fixed manufacturing cost 13,080 178,760 Selling and administrative expenses: Variable $10,350 Fixed 7,560 17,910 During August, Head Gear Inc. manufactured 19,600 hats and sold 20,700 hats....
Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of...
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....
Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of...
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...
Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of...
Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 23,000 hats, of which 21,400 were sold. Operating data for the month are summarized as follows: Sales $179,760 Manufacturing costs: Direct materials $110,400 Direct labor 29,900 Variable manufacturing cost 13,800 Fixed manufacturing cost 11,500 165,600 Selling and administrative expenses: Variable $8,560 Fixed 6,250 14,810 During August, Head Gear Inc. manufactured 19,800 hats and sold 21,400 hats....
Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of...
Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 34,800 hats, of which 32,700 were sold. Operating data for the month are summarized as follows: Sales $261,600 Manufacturing costs: Direct materials $160,080 Direct labor 41,760 Variable manufacturing cost 20,880 Fixed manufacturing cost 17,400 240,120 Selling and administrative expenses: Variable $13,080 Fixed 9,550 22,630 During August, Head Gear Inc. manufactured 30,600 hats and sold 32,700 hats....
Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of...
Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 26,800 hats, of which 25,500 were sold. Operating data for the month are summarized as follows: Sales $183,600 Manufacturing costs: Direct materials $109,880 Direct labor 29,480 Variable manufacturing cost 13,400 Fixed manufacturing cost 10,720 163,480 Selling and administrative expenses: Variable $10,200 Fixed 7,450 17,650 During August, Head Gear Inc. manufactured 24,200 designer hats and sold 25,500...
Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of...
Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 31,600 hats, of which 29,700 were sold. Operating data for the month are summarized as follows: Sales $243,540 Manufacturing costs: Direct materials $148,520 Direct labor 37,920 Variable manufacturing cost 18,960 Fixed manufacturing cost 15,800 221,200 Selling and administrative expenses: Variable $11,880 Fixed 8,670 20,550 During August, Head Gear Inc. manufactured 27,800 designer hats and sold 29,700...
Absorption and Variable Costing Income Statements During the first month of operations ended July 31, YoSan...
Absorption and Variable Costing Income Statements During the first month of operations ended July 31, YoSan Inc. manufactured 9,800 flat panel televisions, of which 9,100 were sold. Operating data for the month are summarized as follows: Sales $1,456,000 Manufacturing costs:     Direct materials $735,000     Direct labor 215,600     Variable manufacturing cost 186,200     Fixed manufacturing cost 98,000 1,234,800 Selling and administrative expenses:     Variable $118,300     Fixed 54,400 172,700 Required: 1. Prepare an income statement based on the absorption...
Absorption and Variable Costing Income Statements During the first month of operations ended July 31, YoSan...
Absorption and Variable Costing Income Statements During the first month of operations ended July 31, YoSan Inc. manufactured 10,400 flat panel televisions, of which 9,800 were sold. Operating data for the month are summarized as follows: Sales $1,715,000 Manufacturing costs:     Direct materials $852,800     Direct labor 260,000     Variable manufacturing cost 218,400     Fixed manufacturing cost 114,400 1,445,600 Selling and administrative expenses:     Variable $137,200     Fixed 63,100 200,300 Required: 1. Prepare an income statement based on the absorption...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT