Question

During the first month of operations ended July 31, 2016, Head Gear Inc. manufactured 6,400 hats, of which 5,200 were sold. Operating data for the month are summarized as follows:

1	Sales		$104,000.00
2	Manufacturing costs:
3	Direct materials	$47,360.00
4	Direct labor	22,400.00
5	Variable manufacturing cost	12,160.00
6	Fixed manufacturing cost	15,360.00	97,280.00
7	Selling and administrative expenses:
8	Variable	$10,920.00
9	Fixed	5,200.00	16,120.00

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

1	Sales		$104,000.00
2	Manufacturing costs:
3	Direct materials	$29,600.00
4	Direct labor	14,000.00
5	Variable manufacturing cost	7,600.00
6	Fixed manufacturing cost	15,360.00	66,560.00
7	Selling and administrative expenses:
8	Variable	$10,920.00
9	Fixed	5,200.00	16,120.00

	Required:
1.	Using the absorption costing concept, prepare income statements for (a) July and (b) August.*
2.	Using the variable costing concept, prepare income statements for (a) July and (b) August.*
3a.	Explain the reason for the differences in the amount of income from operations in (1) and (2) for July.
3b.	Explain the reason for the differences in the amount of income from operations in (1) and (2) for August.
4.	Based on your answers to (1) and (2), did Head Gear Inc. operate more profitably in July or in August? * 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) July and (b) August. 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 July. Score: 8/66 Head Gear Inc. 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) July and (b) August. 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 August. Question not attempted. Score: 0/66 Head Gear Inc. 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) July and (b) August. 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 July. DO A JOURNAL ENTRY FOR VARIABLE INCOME STATEMENT Head Gear Inc. 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) July and (b) August. 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 August. DO A JOURNAL ENTRY FOR VARIABLE INCOME STATEMENT Head Gear Inc. Variable Costing Income Statement 1 2 Variable cost of goods sold: 3 4 5 6 7 8 9 10 11 12

Answer 1

1. a. Head Gear Inc.
Absorption Costing Income Statement for July:
	$	$
Sales		104,000
Cost of Goods Sold:
Variable ( $ 81,920 / 6,400 x 5,200)	66,560
Fixed ( $ 15,360 / 6,400 x 5,200)	12,480	79,040
Gross Profit		24,960
Less: Selling and Administrative Expenses
Variable	10,920
Fixed	5,200	16,120
Operating Income ( Loss)		8,840

b. Absorption Costing Income Statement for August :
	$	$
Sales		104,000
Cost of Goods Sold
Variable	66,560
Fixed	18,240	84,800
Gross Profit		19,200
Less: Selling and Administrative Expenses
Variable	10,920
Fixed	5,200	16,120
Operating Income ( Loss)		3,080

2. a. Head Gear Inc.
Variable Costing Income Statement for July and August:
	July	August
	$	$
Sales	104,000	104,000
Variable Expenses
Manufacturing	66,560	66,560
Selling and Administrative	10,920	10,920
Total Variable Expenses	77,480	77,480
Contribution Margin	26,520	26,520
Less: Fixed Costs
Manufacturing	15,360	15,360
Selling and Administrative	5,200	5,200
Operating Income	5,960	5,960

3. a. & b. Reconciliation Statement for July and August:
	$	$
Absorption Costing Operating Income	8,840	3,080
Add: Fixed Manufacturing Cost in Beginning Finished Goods Inventory	0	2,880
Less: Fixed Manufacturing Cost in Ending Finished Goods Inventory	-2,880	0
Variable Costing Operating Income	5,960	5,960
4. Head Gear operated more profitably in July, as the fixed manufacturing cost per unit in July was only $ 2.40 only ( $ 15,360 / 6,400) as compared to $ 3.84 ( $ 15,360 / 4,000) in August. Therefore, the unit cost of production in July was lower as compared to August