During the first month of operations ended July 31, Head Gear Inc. manufactured 6,400 hats, of which 5,200 were sold. Operating data for the month are summarized as follows: Sales $104,000
Manufacturing costs:
Direct materials $47,360
Direct labor 22,400
Variable manufacturing cost 12,160
Fixed manufacturing cost 15,360 97,280
Selling and administrative expenses:
Variable $10,920
Fixed 5,200 16,120
During August, Head Gear Inc. manufactured 4,000 hats and sold 5,200 hats. Operating data for August are summarized as follows:
Sales $104,000
Manufacturing costs:
Direct materials $29,600
Direct labor 14,000
Variable manufacturing cost 7,600
Fixed manufacturing cost 15,360 66,560
Selling and administrative expenses:
Variable $10,920
Fixed 5,200 16,120
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.

1a Absorption Costing Income Statement for July:

Sales                                                                      $104,000

Cost of Goods Sold:

Variable ($81,920/6,400*5,200)   $66,560

Fixed ($15,360/6,400*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

1b. 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 & Admin Exp.

Variable                           $10,920  

Fixed                                $5,200     $16,120

Operating Income (Loss)                $3,080

2. Variable Costing Income Statement for July and August:

                                                             July          August  

Sale A                                              $104,000    $104,000

Variable Expenses

Manufacturing                                 $66,560     $66,560

Selling and Administrative              $10,920     $10,920

Total Variable Expenses B             $77,480      $77,480

Contribution Margin A-B                 $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 Reconciliation Statement for July and August:

                                                                        July         August

Absorption Costing Operating Income        $8,840    $3,080

Add: Fixed Manufacturing Cost in                $0            $2,880

Beginning Finished Goods Inventory

Less: Fixed Manufacturing Cost in               ($2,880)   $0

Ending Finished Goods Inventory              

Variable Costing Operating Income           $5,960     $5,960

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