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 6,400 hats, of which 5,200 were sold. Operating data for the month are summarized as follows:

Sales			$104,000
Manufacturing costs:
Direct materials	$47,360
Direct labor	22,400
Variable manufacturing cost	12,160
Fixed manufacturing cost	15,360		97,280
Selling and administrative expenses:
Variable	$10,920
Fixed	5,200		16,120

During August, Head Gear Inc. manufactured 4,000 hats and sold 5,200 hats. Operating data for August are summarized as follows:

Sales			$104,000
Manufacturing costs:
Direct materials	$29,600
Direct labor	14,000
Variable manufacturing cost	7,600
Fixed manufacturing cost	15,360		66,560
Selling and administrative expenses:
Variable	$10,920
Fixed	5,200		16,120

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	$
Gross profit
Total cost of goods sold
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:
	$
		$
		$

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

Head Gear Inc.
Variable Costing Income Statement
For the Month Ended July 31
		$
Variable cost of goods sold:
	$
		$
		$
Fixed costs:
	$
		$

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

Head Gear Inc.
Variable Costing Income Statement
For the Month Ended August 31
		$
Variable cost of goods sold:
	$
		$
		$
Fixed costs:
	$
		$

3a. For July, operating income reported under   costing is less than   costing due to part of   manufacturing costs that are expensed.

3b. Which of the following does not appear as a separate line item on the absorption costing income statement for August?

1. Sales.
2. Operating Income.
3. Gross Profit.
4. Cost of Goods Sold.
5. Variable selling and administrative expenses.

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 operating income reported under the absorption costing concept is due to allocating   to the  .

Answer 1

Answer with all working is given below

Q.No.1 a & b) Head Gear Inc. Income Statement- Absorption Costing August 4,000 July Production units 6,400 5,200 Sales 5,200 Closing stock Selling price per unit 1,200 $20 $20 Sales $104,000 $104,000 Less: Cost of Goods Sold Beginning Inventory Finished Goods Direct Material $18,240 $29,600 $14,000 $7,600 $47,360 $22,400 $12,160 Direct Labor Variable Manufacturing Cost Fixed Manufacturing Cost Cost of Goods available for Sale Less: Closing stock (1,200 *$15.20) $15,360 $15,360 $84,800 $97,280 $79,040 $18,240 $84,800 Cost of Goods Sold $19,200 $24,960 Gross Profit Less: Operating expenses Selling and administrative expenses $16,120 $16,120 $3,080 $8,840 Operating Income Head Gear Inc. Income Statement- Variable Costing July Q.No.2 a & b) August 4,000 5,200 Production units 6,400 Sales 5,200 Closing stock Selling price per unit 1,200 0 $20 $20 $104,000 $104,000 Sales Less: Variable Cost of Goods Sold $15,360 $29,600 $14,000 $7,600 $66,560 $0 Beginning Inventory Direct Material Direct Labor Finished Goods $47,360 $22,400 $12,160 $81,920 $15,360 Variable Manufacturing Cost Variable Cost of Goods available for Sale $66,560 $10,920 $66,560 $10,920 $26,520 Less: Closing stock (1,200 *$12.80) Variable Selling and distribution expenses ution Margin $26,520 Less: Fixed Cost $15,360 Manufacturing overhead Selling and Administration expenses $15,360 $5,200 $5,200 $5,960 $5,960 Operating Income За) For July, Operating Income reported under Variable costing is less than Absorption Costing due to part of fixed manufacturing cost that are expenses З Б) Answer is e) Variable selling and administration expenses Head Gear Incwas under the variable costing concept. The difference in operating income reported under 4. the absorption costing concept is due to allocating fixed overheads to the closing stock