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Absorption and Variable Costing Income Statements for Two Months and Analysis During the first month of operations ended July 31, Head Gear Inc. manufactured 33,200 hats, of which 30,900 were sold. Operating data for the month are summarized as follows: $203,940 Manufacturing costs: Direct materials $126,160 Direct labor 33,200 Variable manufacturing cost 16,600 Fixed manufacturing cost 13,280 189,240 Selling and administrative expenses Variable $9,270 Fixed 6,770 16,040 During August, Head Gear Inc. manufactured 28,600 hats and sold 30,900 hats. Operating data for August are summarized as follows: Sales 5203,940 Manufacturing costs Direct materials $108,680 Direct labor 28,600 Variable manufacturing cost 14,300 Fixed manufacturing cost 13,280 164,860 Selling and administrative expenses: Variable $9,270 Fixed 6,790 16,040 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 285.00 Cost of goods sold: Cost of goods manufactured Inventory, July 31 Total cost of goods sold Gross profit Selling and administrative expanses 17. 14 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 203.940 Cost of goods sold: Cost of goods manufactured 189,240 Inventory, July 31 13.110 Total cost of goods sold Gross profit Selling and administrative expenses 16,040 Operating income 11.770 176,130 27.810 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 203.940 Cost of goods sold: Inventory, August 1 Cost of goods manufactured 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 soldi 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 Fred costs: 3a. For July, operating income reported under 3a. For July, operating income 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 operating income 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. 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