Absorption and Variable Costing Income Statements for Two Months and Analysis

During the first month of operations ended July 31, Head Gear Inc. manufactured 30,500 hats, of which 28,400 were sold. Operating data for the month are summarized as follows:

Sales			$227,200
Manufacturing costs:
Direct materials	$140,300
Direct labor	36,600
Variable manufacturing cost	18,300
Fixed manufacturing cost	15,250		210,450
Selling and administrative expenses:
Variable	$11,360
Fixed	8,290		19,650

During August, Head Gear Inc. manufactured 26,300 designer hats and sold 28,400 hats. Operating data for August are summarized as follows:

Sales			$227,200
Manufacturing costs:
Direct materials	$120,980
Direct labor	31,560
Variable manufacturing cost	15,780
Fixed manufacturing cost	15,250		183,570
Selling and administrative expenses:
Variable	$11,360
Fixed	8,290		19,650

Required:

1a. Prepare an income statement for July using the absorption costing concept. Enter all amounts as positive numbers.

1b. Prepare an income statement for August using the absorption costing concept. Enter all amounts as positive numbers.

2a. Prepare an income statement for July using the variable costing concept. Enter all amounts as positive numbers

2b. Prepare an income statement for August using the variable costing concept. Enter all amounts as positive numbers.

a. 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:

a) costs.

b) prices.

c) sales volume.

d) "sales volume", "prices" and "costs" are correct.

e) None of these choices is correct.

The correct answer is:

4. 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 _________.