Question

During the first month of operations ended May 31, Big Sky Creations Company produced 55,000 designer cowboy boots, of which 51,900 were sold. Operating data for the month are summarized as follows:

1	Sales		$804,450.00
2	Manufacturing costs:
3	Direct materials	$467,500.00
4	Direct labor	126,500.00
5	Variable manufacturing cost	77,000.00
6	Fixed manufacturing cost	55,000.00	726,000.00
7	Selling and administrative expenses:
8	Variable	$25,950.00
9	Fixed	25,950.00	51,900.00

During June, Big Sky Creations produced 48,800 designer cowboy boots and sold 51,900 cowboy boots. Operating data for June are summarized as follows:

1	Sales		$804,450.00
2	Manufacturing costs:
3	Direct materials	$414,800.00
4	Direct labor	112,240.00
5	Variable manufacturing cost	68,320.00
6	Fixed manufacturing cost	55,000.00	650,360.00
7	Selling and administrative expenses:
8	Variable	$25,950.00
9	Fixed	25,950.00	51,900.00

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.

Income Statement
	May	June
Sales Revenue	$        804,450.00	$         804,450.00
Cost of Goods Sold
Beginning Inventory	$                         -	$           40,920.00
Cost of Goods Manufactured	$        726,000.00	$         650,360.00
Ending Inventory	$          40,920.00	$                          -
Cost of Goods Sold	$        685,080.00	$         691,280.00
Gross Profit	$        119,370.00	$         113,170.00
Selling and Administrative Expenses
Variable	$          25,950.00	$           25,950.00
Fixed	$          25,950.00	$           25,950.00
Total Selling and Administrative Expenses	$          51,900.00	$           51,900.00
Net Income	$          67,470.00	$           61,270.00

2.

Income Statement (Variable Costing)
	May	June
Sales Revenue	$        804,450.00	$         804,450.00
Variable Expenses
Cost of Goods Sold	$        633,180.00	$         633,180.00
Selling and Administrative Expenses	$          25,950.00	$           25,950.00
Variable Expenses	$        659,130.00	$         659,130.00
Contribution Margin	$        145,320.00	$         145,320.00
Fixed Expenses
Manufacturing Overhead	$          55,000.00	$           55,000.00
Selling and Administrative Expenses	$          25,950.00	$           25,950.00
Total Fixed Expenses	$          80,950.00	$           80,950.00
Net Income	$          64,370.00	$           64,370.00

3.a.

Reconciliation
	May
Income as per Variable Costing	$          64,370.00
Fixed Overhead carried forward	$            3,100.00
Income as per Absorption Costing	$          67,470.00

Fixed Overhead carried forward = $55000/55000 x 3100 = $3100

3b.

Reconciliation
	June
Income as per Variable Costing	$          64,370.00
Less : Fixed Overhead brought forward	$            3,100.00
Income as per Absorption Costing	$          61,270.00

4.
Under absorption costing, the company operated more profitabily in May Since, there was lower production in june which means higher per product cost.