Question

During the first month of operations ended May 31, Big Sky Creations Company produced 40,000 designer cowboy boots, of which 36,000 were sold. Operating data for the month are summarized as follows:

1	Sales		$4,500,000.00
2	Manufacturing costs:
3	Direct materials	$960,000.00
4	Direct labor	2,000,000.00
5	Variable manufacturing cost	520,000.00
6	Fixed manufacturing cost	120,000.00	3,600,000.00
7	Selling and administrative expenses:
8	Variable	$72,000.00
9	Fixed	80,000.00	152,000.00

During June, Big Sky Creations produced 32,000 designer cowboy boots and sold 36,000 cowboy boots. Operating data for June are summarized as follows:

1	Sales		$4,500,000.00
2	Manufacturing costs:
3	Direct materials	$7,680,000.00
4	Direct labor	1,600,000.00
5	Variable manufacturing cost	416,000.00
6	Fixed manufacturing cost	120,000.00	2,904,000.00
7	Selling and administrative expenses:
8	Variable	$72,000.00
9	Fixed	80,000.00	152,000.00

	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.

Labels
June 30
Cost of goods sold
Fixed costs
For the Month Ended June 30
For the Month Ended May 31
May 31
Variable cost of goods sold
Amount Descriptions
Contribution margin
Contribution margin ratio
Cost of goods manufactured
Fixed manufacturing costs
Fixed selling and administrative expenses
Gross profit
Operating income
Inventory, June 1
Inventory, May 31
Operating loss
Manufacturing margin
Planned contribution margin
Sales
Sales mix
Selling and administrative expenses
Total cost of goods sold
Total fixed costs
Total variable cost of goods sold
Variable cost of goods manufactured
Variable selling and administrative expenses

Answer 1

1. Absorption Costing

Product Cost	May	June
Direct Material	$                24.00	$                24.00
Direct Labor	$                50.00	$                50.00
Variable Manufacturing Overhead	$                13.00	$                13.00
Fixed manufacturing Overhead	$                  3.00	$                  3.75
Product Cost per unit	$                90.00	$                90.75

Income Statement	May	June
Sales Revenue		$       4,500,000		$     4,500,000
Cost of Goods Sold
Beginning Inventory	$                       -		$            360,000
Direct Material	$           864,000		$            768,000
Direct Labor	$       1,800,000		$        1,600,000
Variable Manufacturing Overhead	$           468,000		$            416,000
Fixed manufacturing Overhead	$           108,000		$            120,000
Total Cost of Goods Sold		$       3,240,000		$     3,264,000
Gross Profit		$       1,260,000		$     1,236,000
Less Operating Expenses
Variable Selling and administrative exp	$             72,000		$              72,000
Fixed Selling and administrative	$             80,000		$              80,000
Total Operating Expenses		$           152,000		$         152,000
Net Operating Income		$       1,108,000		$     1,084,000

2. Variable Costing

Income Statement	May	June
Sales Revenue		$       4,500,000		$     4,500,000
Variable Cost of Goods Sold
Beginning Inventory	$                       -		$            348,000
Direct Material	$           864,000		$            768,000
Direct Labor	$       1,800,000		$        1,600,000
Variable Manufacturing Overhead	$           468,000		$            416,000
Total Variable Cost of Goods Sold		$       3,132,000		$     3,132,000
Gross Contribution Margin		$       1,368,000		$     1,368,000
Variable Selling and administrative exp		$             72,000		$           72,000
Net Contribution Margin		$       1,296,000		$     1,296,000
Less Fixed Expenses
Fixed manufacturing Overhead	$           120,000		$            120,000
Fixed Selling and administrative	$             80,000		$              80,000
Total Fixed Expenses		$           200,000		$         200,000
Net Operating Income		$       1,096,000		$     1,096,000

3a. May

Income as per Variable Costing	$       1,096,000
Fixed Overhead Carried forward	$             12,000
Income as per Absorption Costing	$       1,108,000

3b. June

Income as per Variable Costing	$       1,096,000
Fixed Overhead Brought forward	$            -12,000
Income as per Absorption Costing	$       1,084,000

4.
Company operated more profitability in May, since more units were produced making per unit cost lower