Question

Instructions: Please make sure everything is correct if not correct and give correct calculation pls.

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 hats. Operating data for August are summarized as follows:

Sales			$183,600
Manufacturing costs:
Direct materials	$99,220
Direct labor	26,620
Variable manufacturing cost	12,100
Fixed manufacturing cost	10,720		148,660
Selling and administrative expenses:
Variable	$10,200
Fixed	7,450		17,650

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:
Direct materials	$
Direct labor
Total cost of goods sold
Selling and administrative expenses		$
Selling and administrative expenses
Loss from operations		$

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:
Variable cost of goods sold	$
Manufacturing margin
Total cost of goods sold
Selling and administrative expenses		$
Total cost of goods sold
Loss 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
Inventory, July 31		$
Variable cost of goods sold:
Variable cost of goods manufactured	$
Contribution margin
Fixed cost of goods sold
Fixed manufacturing costs		$
Inventory, July 31
Cost of goods manufactured		$
Fixed costs:
Variable cost of goods manufactured	$
Variable cost of goods manufactured
Fixed selling and administrative expenses
Loss 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
Contribution margin		$
Variable cost of goods sold:
Direct labor	$
Direct labor
Contribution margin
Direct labor		$
Inventory, August 1
Sales		$
Fixed costs:
Fixed contribution margin	$
Fixed manufacturing margin
Fixed selling and administrative expenses
Income from operations		$

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 more profitable in July than Augustmore profitable in July than 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 .

Answer 1

income statement under absorbtion costing for the month of july,august

particular	july $	august $
Sales	$183,600	$183,600
(-)cost of goods sold
Direct materials	$109,880	$99,220
Direct labor	29,480	26,620
Variable manufacturing cost	13,400	12,100
Fixed manufacturing cost	10,720	10,720
cost of goods manufactured	163480	148,660
add:opening stock of inventory	nil	7930
cost of goods avilable for sale	163480	156590
less:closeing inventory ?(26800-25500)units*163480%$/26800)	(7930) (1300*6.1$)	nil
cost of goods sold	155550	156590
gross profit (sales-c.o.g.s)	28050	27010
less:Selling and administrative expenses:
veriable	10,200	10,200
fixed	7450	7450
net incomefrom oparetions	10400	9360

income statement under veriable costing for the month of july,august

particulars	july$	august$
Sales	183600	183600
less:veriable cost
Direct materials	109,880	99,220
Direct labor	29,480	26620
Variable manufacturing cost	13,400	12100
cost of goods manufactured	152760	137940
add: opening inventory	nil	7410
less:    closeing inventory(1300units*152760$/26800)	7410	nil
gross contribition margin	38250	38250
less:    veriable selling exp	10200	10200
net contribution margin	28050	28050
less:    Fixed manufacturing cost	10720	10720
Fixed selling&admin exp	7450	7450
net incomefrom oparetions	9880	9880

EXPLANATION ALREADY GIVEN IN QUESTION