Question

During the first month of operations ended May 31, Big Sky Creations Company produced 40,000 designer cowboy boots, of which 36,000 were sold. Operating data for the month are summarized as follows:

1	Sales		$4,500,000.00
2	Manufacturing costs:
3	Direct materials	$960,000.00
4	Direct labor	2,000,000.00
5	Variable manufacturing cost	520,000.00
6	Fixed manufacturing cost	120,000.00	3,600,000.00
7	Selling and administrative expenses:
8	Variable	$72,000.00
9	Fixed	80,000.00	152,000.00

During June, Big Sky Creations produced 32,000 designer cowboy boots and sold 36,000 cowboy boots. Operating data for June are summarized as follows:

1	Sales		$4,500,000.00
2	Manufacturing costs:
3	Direct materials	$7,680,000.00
4	Direct labor	1,600,000.00
5	Variable manufacturing cost	416,000.00
6	Fixed manufacturing cost	120,000.00	2,904,000.00
7	Selling and administrative expenses:
8	Variable	$72,000.00
9	Fixed	80,000.00	152,000.00

	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

1.

Big sky creation company

Income statement (Absorption costing)

For the month ended May 31,

Slaes $4,050,000 Manufacturing cost: Direct material $864,000 Direct labor $1,800,000 Variable manufacuring cost $468,000 Fixed manufacturing cost $108,000 Cost of goods sold $3,240,000 Gross profit $810,000 Selling and administrative expenses: Variable $72,000 Fixed $80,000 Total selling and administrative expenses: $152,000 Operating income $658,000

Big sky creation company

Income statement (Absorption costing)

For the month ended June 31,

Slaes $4,950,000 Manufacturing cost: Direct material $864,000 Direct labor $1,800,000 Variable manufacuring cost $468,000 Fixed manufacturing cost $132,000 Cost of goods sold $3,264,000 Gross profit $1,680,000 Selling and administrative expenses: Variable $72,000 Fixed $80,.000 Total selling and administrative expenses: $152,000 Operating income $1,534,000

2.

Big sky creation company

Income statement (Variable costing)

For the month ended May 31,

Sales $4,950,000 Variable cost: Direct material $864,000 Direct labor $1,800,000 Variable manufacturing cost $468,000 Variable selling and administrative cost $72,000 Total variable cost $3,204,000 Contribution margin $846,000 Fixed cost: Fixed manufacturing cost $120,000 Fixed selling and administrative cost $80,000 Total fixed cost $200,000 Operating income $646,000

Big sky creation company

Income statement (Variable costing)

For the month ended June 31,

Sales $4,050,000 Variable cost: Direct material $864,000 Direct labor $1,800,000 Variable manufacturing cost $468,000 Variable selling and administrative cost $72,000 Total variable cost $3,204,000 Contribution margin $1,746,000 Fixed cost: Fixed manufacturing cost $120,000 Fixed selling and administrative cost $80,000 Total fixed cost $200,000 Operating income $1,546,000

3.a)

The differance between operating income under absorption cost and variable costing is treatment of fixed manufacturing cost. In absorption costing, fixed manufacturing cost treated as product cost, cost will be allocated to the product. In variable costing , fixed manufacturing cost is treated as period cost, it will expenses as incurred.

In May, production was greater than sales, so the fixed manufacturing cost of ending inventory will trasferred to balance sheet.

40,000(Production)-36,000(Sales) = 4,000 * $3 = $12,000

Fixed manufacturing cost per unit in ending inventory= $120,000/4,0000 = $3

This cost will incur when product is sold in June.

So operating income under absorption costing will show high operating profit than operating under variable costing in may.

$658,000 - $6460,00 = $12,000

3.b)

The differance between operating income under absorption cost and variable costing is treatment of fixed manufacturing cost. In absorption costing, fixed manufacturing cost treated as product cost, cost will be allocated to the product. In variable costing , fixed manufacturing cost is treated as period cost, it will expensed as incurred.

In June, sales was greater than production, so the fixed manufacturing cost of begning inventory will trasferred to cost of goods sold.

36,000(Sales)-32,000(Production) = 4,000 * $3 = $12,000

Fixed manufacturing cost per unit in begning inventory = $120,000/4,0000 = $3

This cost will incur when product is sold in June.

So operating income under Variable costing costing will show high operating profit than operating under absorption  costing in june.

1,546,000-1,534,000 = $12,000.

4

Operating income in june showes high profitability. Big sky creation company produced more goods than sales in May. So, the profit from ending inventory will realise when it is sold in June.

Company sold more goods than production in June. the profit from begning inventory is realised when it is sold in june.