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 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. Operating data for August are summarized as follows:

Sales			$179,760
Manufacturing costs:
Direct materials	$95,040
Direct labor	25,740
Variable manufacturing cost	11,880
Fixed manufacturing cost	11,500		144,160
Selling and administrative expenses:
Variable	$8,560
Fixed	6,250		14,810

Required:

1a. Prepare income statement for July using the absorption costing concept.

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
Operating income		$

1b. Prepare income statement for August using the absorption costing concept.

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
Operating income		$

2a. Prepare income statement for July using the variable costing concept.

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
Operating income		$

2b. Prepare income statement for August using the variable costing concept.

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
Operating income		$

Answer 1

Head Gear Inc
Absorption Costing Income Statement
For The Month Ended July 31
	Amount	Amount
Sales		$179,760.00
Less: Cost Of Goods Sold
Beginning Inventory
Cost Of Goods Manufactured	$165,600.00
Cost Of Goods Available For Sale	$165,600.00
Less: Ending Inventory (165600/23000)*(23000-21400)	-$11,520.00	$154,080.00
Gross Profit		$25,680.00
Selling And Administrative Expenses
Variable	$8,560.00
Fixed	$6,250.00
Total Selling And Administrative Expenses		$14,810.00
Income From Operations		$10,870.00
Head Gear Inc
Absorption Costing Income Statement
For The Month Ended August 31
	Amount	Amount
Sales		$179,760.00
Less: Cost Of Goods Sold
Beginning Inventory	$11,520.00
Cost Of Goods Manufactured	$144,160.00
Cost Of Goods Available For Sale	$155,680.00
Less: Ending Inventory	$0.00	$155,680.00
Gross Profit		$24,080.00
Selling And Administrative Expenses
Variable	$8,560.00
Fixed	$6,250.00
Total Selling And Administrative Expenses		$14,810.00
Income From Operations		$9,270.00
Head Gear Inc.
Variable Costing Income Statement
For the month ended July 31
	Amount	Amount
Sales		179,760
Less: Variable Expenses
Cost of Goods Sold
Beginning Inventory	0
Variable Cost of Goods Manufactured	154,100
Less: Ending Inventory (154100/23000)*1600	-10,720	143,380
Selling and Administrative Expenses		8,560
Contribution Margin		27,820
Fixed Costs
Manufacturing	11,500
Selling and Administrative	6,250
Total Fixed Costs		17,750
Income from Operations		10,070
Head Gear Inc.
Variable Costing Income Statement
For the month ended Aug 31
	Amount	Amount
Sales		179,760
Less: Variable Expenses
Cost of Goods Sold
Beginning Inventory	10720
Variable Cost of Goods Manufactured	132,660
Less: Ending Inventory	0	143,380
Selling and Administrative Expenses		8,560
Contribution Margin		27,820
Fixed Costs
Manufacturing	11,500
Selling and Administrative	6,250
Total Fixed Costs		17,750
Income from Operations		10,070