Absorption and Variable Costing Income Statements for Two Months and Analysis Du
ID: 2405703 • Letter: A
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 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
$
Cost of goods sold:
$
$
$
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
$
Cost of goods sold:
$
$
$
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
$
Variable cost of goods sold:
$
$
$
Fixed costs:
$
$
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
$
Variable cost of goods sold:
$
$
$
Fixed costs:
$
$
3a. For July, income from operations reported under costing is less than costing due to part of 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:
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 under the variable costing concept. The difference in income reported under the absorption costing concept is due to allocating to the .
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
Explanation / Answer
3a.For July, income from operations reported under variable costing is less than absorption costing due to part of manufacturing costs that are expensed.
4.Head Gear Inc operate more profitably in July where under absorption costing the profit is $10400.
Head Gear Inc. was $9880 under the variable costing concept. The difference in income reported under the absorption costing concept is due to allocating to the fixed manufacturing costs.
31-Jul Per unit cost Sales $183,600 7.20 Manufacturing costs: 4.10 Direct materials $109,880 1.10 Direct labor 29,480 5.70 0.50 Variable manufacturing cost 13,400 6.10 0.40 Fixed manufacturing cost 10,720 163,480 Selling and administrative expenses: 0.40 Variable $10,200 Fixed 7,450 17,650 Income statement for July (based on absorption costing concept) Head Gear Inc Absorption costing Income statement For the month ended July 31 Sales 183600 25500*7.20 Less : Cost of Goods Sold -155550 155550 (26800-1300)*6.10) Gross Profit 28050 Less : Selling and administrative Expenses Variable 10200 Fixed 7450 -17650 Net operating Income 10400 Head Gear Inc Variable costing Income statement For the month ended July 31 Sales 25500*7.20 183600 Less : Cost of Goods sold (26800-1300)*5.70 -145350 Gross contribution margin 38250 Less : Variable marketing and admin expense -10200 Contribution margin 28050 Less: Fixed expense Fixed manufacturing overhead expense 10720 Fixed marketing and administrative expense 7450 -18170 Net Operating Income 9880 Sales $183,600 25500 $7.20 Manufacturing costs: Direct materials $99,220 24200 $4.10 Direct labor 26,620 24200 1.1 Variable manufacturing cost 12,100 24200 0.5 $5.70 Fixed manufacturing cost 10,720 148,660 24200 0.44 $6.14 Selling and administrative expenses: Variable $10,200 Fixed 7,450 17,650 Opening 1300 Produce 24200 Less : Sold -25500 0 Head Gear Inc. Absorption Costing Income Statement For the Month Ended August 31 Sales 183600 Less: Cost of goods sold Opening stock + Purchase = (25500*6.14) -156570 Gross Profit 27030 Less : Selling and administrative Expenses Variable 10200 Fixed 7450 -17650 Net Operating Income 9380 Head Gear Inc. Variable Costing Income Statement For the Month Ended August 31 Sales 183600 Less: Cost of goods sold Opening stock + Purchase = (25500*5.70) -145350 Gross Contribution Margin 38250 Less : Variable selling and administrative expenses -10200 Contribution Margin 28050 Less : Fixed expense Fixed manufacturing overhead expense 10720 Fixed marketing and administrative expense 7450 -18170 Net Operating Income 9880