Question

During the first month of operations ended March 31, 2016, Hip and Conscious Clothing Company produced 56,250 designer cowboy hats, of which 52,950 were sold. Operating data for the month are summarized as follows:

1	Sales		$794,250.00
2	Manufacturing costs:
3	Direct materials	$416,250.00
4	Direct labor	135,000.00
5	Variable manufacturing cost	61,875.00
6	Fixed manufacturing cost	56,250.00	669,375.00
7	Selling and administrative expenses:
8	Variable	$31,770.00
9	Fixed	26,475.00	58,245.00

During April, Hip and Conscious Clothing produced 49,650 designer cowboy hats and sold 52,950 cowboy hats. Operating data for April are summarized as follows:

1	Sales		$794,250.00
2	Manufacturing costs:
3	Direct materials	$367,410.00
4	Direct labor	119,160.00
5	Variable manufacturing cost	54,615.00
6	Fixed manufacturing cost	56,250.00	597,435.00
7	Selling and administrative expenses:
8	Variable	$31,770.00
9	Fixed	26,475.00	58,245.00

	Required:
1.	Using the absorption costing concept, prepare income statements for (a) March and (b) April.*
2.	Using the variable costing concept, prepare income statements for (a) March and (b) April.*
3a.	Explain the reason for the differences in the amount of income from operations in (1) and (2) for March.
3b.	Explain the reason for the differences in the amount of income from operations in (1) and (2) for April.
4.	Based on your answers to (1) and (2), did Hip and Conscious Clothing Company operate more profitably in March or in April? * Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. “Less”, “Plus” or colons (:) will automatically appear if required. If a net loss is incurred, enter that amount as a negative number using a minus sign. 1a. Using the absorption costing concept, prepare income statements for (a) March and (b) April. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. “Less”, “Plus” or colons (:) will automatically appear if required. If a net loss is incurred, enter that amount as a negative number using a minus sign. The following income statement is for March. Hip and Conscious Clothing Company Absorption Costing Income Statement 1 2 Cost of goods sold: 3 4 5 6 7 8 1b. Using the absorption costing concept, prepare income statements for (a) March and (b) April. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. “Less”, “Plus” or colons (:) will automatically appear if required. If a net loss is incurred, enter that amount as a negative number using a minus sign. The following income statement is for April. Hip and Conscious Clothing Company Absorption Costing Income Statement 1 2 Cost of goods sold: 3 4 5 6 7 8 2a. Using the variable costing concept, prepare income statements for (a) March and (b) April. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. “Less”, “Plus” or colons (:) will automatically appear if required. If a net loss is incurred, enter that amount as a negative number using a minus sign. The following income statement is for March. Hip and Conscious Clothing Company Variable Costing Income Statement 1 2 Variable cost of goods sold: 3 4 5 6 7 8 9 10 11 12 2b. Using the variable costing concept, prepare income statements for (a) March and (b) April. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. “Less”, “Plus” or colons (:) will automatically appear if required. If a net loss is incurred, enter that amount as a negative number using a minus sign. The following income statement is for April. Hip and Conscious Clothing Company Variable Costing Income Statement 1 2 Variable cost of goods sold: 3 4 5 6 7 8 9 10 11 12

Answer 1

Solution 1:

Income Statement - Absorption Cosing - March Hip and Conscious Clothing Company
Particulars	Per unit	Details	Amount
Sales	$15.00		$794,250.00
Cost of Goods Sold:
Cost of goods produced	$11.90	$669,375.00
Add: Opening Inventory		0
Less: Ending Inventory	$11.90	$39,270.00	$630,105.00
Gross Profit			$164,145.00
Variable Selling & Administrative Expenses			$31,770.00
Fixed Selling & Administrative Expenses			$26,475.00
Net Operating Income			$105,900.00

Income Statement - Absorption Cosing - April Hip and Conscious Clothing Company
Particulars	Per unit	Details	Amount
Sales	$15.00		$794,250.00
Cost of Goods Sold:
Cost of goods produced	$12.03	597435
Add: Opening Inventory	$11.90	39270
Less: Ending Inventory		0	$636,705.00
Gross Profit			$157,545.00
Variable Selling & Administrative Expenses			$31,770.00
Fixed Selling & Administrative Expenses			$26,475.00
Net Operating Income			$99,300.00

Solution 2:

Variable costing contribution format income statement - March Hip and Conscious Clothing Company
Particulars	Per unit	Details	Amount
Sales	$15.00	52950*$15	$794,250.00
Variable Cost:
Direct Material	$7.40	52950*$7.40	$391,830.00
Direct Labor	$2.40	52950*$2.40	$127,080.00
Variable Manufacturing Overhead	$1.10	52950*$1.10	$58,245.00
Variable Selling and Administrative Expenses	$0.60	52950*$0.60	$31,770.00
Contribution	$3.50		$185,325.00
Fixed Manufacturing Overhead			$56,250.00
Fixed Selling & Administrative Expenses			$26,475.00
Net Operating Income			$102,600.00

Variable costing contribution format income statement - April Hip and Conscious Clothing Company
Particulars	Per unit	Details	Amount
Sales	$15.00	52950*$15	$794,250.00
Variable Cost:
Direct Material	$7.40	52950*$7.40	$391,830.00
Direct Labor	$2.40	52950*$2.40	$127,080.00
Variable Manufacturing Overhead	$1.10	52950*$1.10	$58,245.00
Variable Selling and Administrative Expenses	$0.60	52950*$0.60	$31,770.00
Contribution	$3.50		$185,325.00
Fixed Manufacturing Overhead			$56,250.00
Fixed Selling & Administrative Expenses			$26,475.00
Net Operating Income			$102,600.00

Solution 3a:

Reconciliation of Net Operating income under absorption costing & Variable Costing
Particulars	March
Net Operating Income - Variable Costing	$102,600.00
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing ($1*3300)	$3,300.00
Less: Fixed manufacturing overhead cost released in inventory under absorption costing	$0.00
Net Operating Income - Absorption Costing	$105,900.00

Solution 3b:

Reconciliation of Net Operating income under absorption costing & Variable Costing
Particulars	April
Net Operating Income - Variable Costing	$102,600.00
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing	$0.00
Less: Fixed manufacturing overhead cost released in inventory under absorption costing	$3,300.00
Net Operating Income - Absorption Costing	$99,300.00

Solution 4:

From abosorption costing point of view, Hip and Conscious Clothing Company operate more profitably in March. However from variable costing point of view, Hip and Conscious Clothing Company operate equally in both the months.