Absorption and Variable Costing Income Statements for Two Months and Analysis
During the first month of operations ended July 31, Head Gear Inc. manufactured 26,800 hats, of which 25,500 were sold. Operating data for the month are summarized as follows:
Sales
$183,600
Manufacturing costs:
Direct materials
$109,880
Direct labor
29,480
Variable manufacturing cost
13,400
Fixed manufacturing cost
10,720
163,480
Selling and administrative expenses:
Variable
$10,200
Fixed
7,450
17,650
During August, Head Gear Inc. manufactured 24,200 designer hats and sold 25,500 hats. Operating data for August are summarized as follows:
Sales
$183,600
Manufacturing costs:
Direct materials
$99,220
Direct labor
26,620
Variable manufacturing cost
12,100
Fixed manufacturing cost
10,720
148,660
Selling and administrative expenses:
Variable
$10,200
Fixed
7,450
17,650
Required:
1a. Prepare an income statement for July using the absorption costing concept. Enter all amounts as positive numbers.
Head Gear Inc.
Absorption Costing Income Statement
For the Month Ended July 31
$
Cost of goods sold:
$
$
$
1b. Prepare an income statement for August using the absorption costing concept. Enter all amounts as positive numbers.
Head Gear Inc.
Absorption Costing Income Statement
For the Month Ended August 31
$
Cost of goods sold:
$
$
$
2a. Prepare an income statement for July using the variable costing concept. Enter all amounts as positive numbers.
Head Gear Inc.
Variable Costing Income Statement
For the Month Ended July 31
$
Variable cost of goods sold:
$
$
$
Fixed costs:
$
$
2b. Prepare an income statement for August using the variable costing concept. Enter all amounts as positive numbers.
Head Gear Inc.
Variable Costing Income Statement
For the Month Ended August 31
$
Variable cost of goods sold:
$
$
$
Fixed costs:
$
$
3a. 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:
costs.
prices.
sales volume.
"sales volume", "prices" and "costs" are correct.
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 income reported under the absorption costing concept is due to allocating to the .
Absorption and Variable Costing Income Statements for Two Months and Analysis
During the first month of operations ended July 31, Head Gear Inc. manufactured 26,800 hats, of which 25,500 were sold. Operating data for the month are summarized as follows:
| Sales | $183,600 | |||
| Manufacturing costs: | ||||
| Direct materials | $109,880 | |||
| Direct labor | 29,480 | |||
| Variable manufacturing cost | 13,400 | |||
| Fixed manufacturing cost | 10,720 | 163,480 | ||
| Selling and administrative expenses: | ||||
| Variable | $10,200 | |||
| Fixed | 7,450 | 17,650 | ||
During August, Head Gear Inc. manufactured 24,200 designer hats and sold 25,500 hats. Operating data for August are summarized as follows:
| Sales | $183,600 | |||
| Manufacturing costs: | ||||
| Direct materials | $99,220 | |||
| Direct labor | 26,620 | |||
| Variable manufacturing cost | 12,100 | |||
| Fixed manufacturing cost | 10,720 | 148,660 | ||
| Selling and administrative expenses: | ||||
| Variable | $10,200 | |||
| Fixed | 7,450 | 17,650 | ||
Required:
1a. Prepare an income statement for July using the absorption costing concept. Enter all amounts as positive numbers.
| Head Gear Inc. | ||
| Absorption Costing Income Statement | ||
| For the Month Ended July 31 | ||
| $ | ||
| Cost of goods sold: | ||
| $ | ||
| $ | ||
| $ | ||
1b. Prepare an income statement for August using the absorption costing concept. Enter all amounts as positive numbers.
| Head Gear Inc. | ||
| Absorption Costing Income Statement | ||
| For the Month Ended August 31 | ||
| $ | ||
| Cost of goods sold: | ||
| $ | ||
| $ | ||
| $ | ||
2a. Prepare an income statement for July using the variable costing concept. Enter all amounts as positive numbers.
| Head Gear Inc. | ||
| Variable Costing Income Statement | ||
| For the Month Ended July 31 | ||
| $ | ||
| Variable cost of goods sold: | ||
| $ | ||
| $ | ||
| $ | ||
| Fixed costs: | ||
| $ | ||
| $ | ||
2b. Prepare an income statement for August using the variable costing concept. Enter all amounts as positive numbers.
| Head Gear Inc. | ||
| Variable Costing Income Statement | ||
| For the Month Ended August 31 | ||
| $ | ||
| Variable cost of goods sold: | ||
| $ | ||
| $ | ||
| $ | ||
| Fixed costs: | ||
| $ | ||
| $ | ||
3a. 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:
costs.
prices.
sales volume.
"sales volume", "prices" and "costs" are correct.
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 income reported under the absorption costing concept is due to allocating to the .
Related questions
During the first month of operations ended July 31, WesternCreations Company produced 80,000 designer cowboy hats, of which72,000 were sold. Operating data for the month are summarized asfollows:
1 | Sales | $4,320,000.00 | |
2 | Manufacturing costs: | ||
3 | Direct materials | $1,600,000.00 | |
4 | Direct labor | 1,440,000.00 | |
5 | Variable manufacturing cost | 240,000.00 | |
6 | Fixed manufacturing cost | 320,000.00 | 3,600,000.00 |
7 | Selling and administrative expenses: | ||
8 | Variable | $144,000.00 | |
9 | Fixed | 25,000.00 | 169,000.00 |
During August, Western Creations produced 64,000 designer cowboyhats and sold 72,000 cowboy hats. Operating data for August aresummarized as follows:
1 | Sales | $4,320,000.00 | |
2 | Manufacturing costs: | ||
3 | Direct materials | $1,280,000.00 | |
4 | Direct labor | 1,152,000.00 | |
5 | Variable manufacturing cost | 192,000.00 | |
6 | Fixed manufacturing cost | 320,000.00 | 2,944,000.00 |
7 | Selling and administrative expenses: | ||
8 | Variable | $144,000.00 | |
9 | Fixed | 25,000.00 | 169,000.00 |
| Required: | ||||||||||
| 1. | Using the absorption costingconcept, prepare income statements for (a) July and (b)August.* | |||||||||
| 2. | Using the variable costingconcept, prepare income statements for (a) July and (b)August.* | |||||||||
| 3a. | Explain the reason for thedifferences in the amount of income from operations in (1) and (2)for July. | |||||||||
| 3b. | Explain the reason for thedifferences in the amount of income from operations in (1) and (2)for August. | |||||||||
| 4. | Based on your answers to (1)and (2), did Western Creations Company operate more profitably inJuly or in August? Explain.
|
Mannarelli Corporation uses the FIFO method in its processcosting system. Operating data for the Casting Department for themonth of September appear below:
| Units | PercentComplete with Respect to Conversion | |
| Beginning workin process inventory | 19,000 | 25% |
| Transferred infrom the prior department during September | 99,000 | |
| Ending work inprocess inventory | 29,000 | 90% |
According to the company's records, the conversion cost inbeginning work in process inventory was $16,160 at the beginning ofSeptember. Additional conversion costs of $531,556 were incurred inthe department during the month. |
The cost per equivalent unit for conversion costs for Septemberis closest to (Round off to three decimal places.): |
$4.642
$4.817
$5.369
$4.669
During February, Degan Inc. transferred $55,000 from Work inProcess to Finished Goods and recorded a Cost of Goods Sold of$60,000 (assume there was enough beginning balance in the Finishedgoods inventory account). The journal entries to record thesetransactions would include a:
credit to Finished Goods of $55,000
debit to Finished Goods of $60,000
credit to Cost of Goods Sold of $60,000
credit to Work in Process of $55,000
Carr Company produces a single product. During the past year,Carr manufactured 42,000 units and sold 28,500 units. Productioncosts for the year were as follows:
| Fixed manufacturing overhead | $ 420,000 |
| Variable manufacturing overhead | $ 525,000 |
| Direct labor | $ 344,400 |
| Direct materials | $ 445,200 |
Sales totaled $2,137,500, variable selling expenses totaled$424,200, and fixed selling and administrative expenses totaled$187,000. There were no units in beginning inventory. Assume thatdirect labor is a variable cost.
Under absorption costing, the ending inventory for the year wouldbe valued at (Do not round your intermediate calculations.):
$557,550
$646,129
$752,657
$711,284
| The followingdata were taken from the accounting records of Abacus Company whichuses the FIFO method in its process costing system: |
| Beginning work in process inventory: | 30,000 units(materials 100% complete, labor and overhead 70% complete) |
| Started in process during the period: | 100,000units |
| Endingwork in process inventory: | 40,000 units(materials 100% complete, labor and overhead 80% complete) |
The equivalent units are:
Material, 134,000 units; labor and overhead, 132,000 units
Material, 130,000 units; labor and overhead, 122,000 units
Material, 100,000 units; labor and overhead, 101,000 units
Material, 91,000 units; labor and overhead, 83,000 units
Budget data for the Bidwell Company are as follows:
| Sales (170,000 units) | $1,700,000 | ||
| Expenses: | Fixed | Variable | |
| Raw materials | $ 510,000 | ||
| Direct labor | 340,000 | ||
| Overhead | $ 170,000 | 255,000 | |
| Selling and administrative | 187,000 | 85,000 | |
| Total expenses | $ 357,000 | $ 1,190,000 | 1,547,000 |
| Netoperating income | $ 153,000 |
| The number ofunits Bidwell would have to sell to earn a net operating income of$255,000 is: |
170,000 units
119,000 units
204,000 units
255,000 units
DeAnne Company produces a single product. The company's variablecosting income statement for August appears below:
| DeAnne Company Income statement For the month ended August 31 | |
| Sales ($21 per unit) | $1,134,000 |
| Variable expenses: | |
| Variable cost of goods sold | 486,000 |
| Variable selling expense | 108,000 |
| Total variable expenses | 594,000 |
| Contribution margin | 540,000 |
| Fixed expenses: | |
| Fixed manufacturing | 147,000 |
| Fixed selling and administrative | 49,000 |
| Total fixed expenses | 196,000 |
| Netoperating income | $344,000 |
The company produced 49,000 units in August and the beginninginventory consisted of 22,000 units. Variable production costs perunit and total fixed costs have remained constant over the pastseveral months.
The value of the company's inventory on August 31 under theabsorption costing method is (Do not round your intermediatecalculations.):
$204,000
$238,000
$153,000
$253,426
Candice Corporation has decided to introduce a new product. Theproduct can be manufactured using either a capital-intensive orlabor-intensive method. The manufacturing method will not affectthe quality or sales of the product. The estimated manufacturingcosts of the two methods are as follows:
| Capital-Intensive | Labor-Intensive | |||||||
| Variable manufacturing cost per unit | $ | 14.00 | $ | 17.60 | ||||
| Fixed manufacturing cost per year | $ | 2,606,000 | $ | 1,417,600 | ||||
The company's market research department has recommended anintroductory selling price of $30 per unit for the new product. Theannual fixed selling and administrative expenses of the new productare $600,000. The variable selling and administrative expenses are$2 per unit regardless of how the new product is manufactured. |
Required: | |
| a. | Calculate the break-even point in units if Candice Corporationuses the (Do not round intermediatecalculations.): |
| Break-evenpoint in units | |
| Capital-intensive manufacturing method | |
| Labor-intensive manufacturing method | |
| b. | Determine the unit sales volume at which the net operatingincome is the same for the two manufacturing methods. (Donot round intermediate calculations. Round your answer to thenearest whole number.) |
| Sales volume |
| c. | Assuming sales of 440,000 units, what is the degree of operatingleverage if the company uses the: (Do not roundintermediate calculations. Round your answers to 2 decimalplaces.) |
| Degree ofoperating leverage | |
| Capital-intensive manufacturing method | |
| Labor-intensive manufacturing method | |
| d. | What is your recommendation to management concerning whichmanufacturing method should be used, if the sales volume is inexcess of the one calculated under Requirement (b)? | ||||
|
| Hickory Company manufactures two productsâ13,000 units ofProduct Y and 5,000 units of Product Z. The company uses aplantwide overhead rate based on direct labor-hours. It isconsidering implementing an activity-based costing (ABC) systemthat allocates all of its manufacturing overhead to four costpools. The following additional information is available for thecompany as a whole and for Products Y and Z: (The totalestimated overhead cost may not agree with the sum of allocatedoverhead costs to each product.)
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Ermoin Inc. uses the FIFO method in its process costing system.The following data concern the operations of the company's firstprocessing department for a recent month.
| Workin process, beginning: | |||||
| Units in process | 2,400 | ||||
| Percent complete with respect tomaterials | 70 | % | |||
| Percent complete with respect toconversion | 30 | % | |||
| Costs in the beginning inventory: | |||||
| Materials cost | $ | 4,140 | |||
| Conversion cost | $ | 6,265 | |||
| Units started into production during the month | 17,900 | ||||
| Units completed and transferred out | 17,900 | ||||
| Costs added to production during the month: | |||||
| Materials cost | $ | 165,490 | |||
| Conversion cost | $ | 560,270 | |||
| Workin process, ending: | |||||
| Units in process | 2,400 | ||||
| Percent complete with respect tomaterials | 50 | % | |||
| Percent complete with respect toconversion | 30 | % | |||
| Required: |
Using the FIFO method: |
| a. | Determine theequivalent units of production for materials and conversioncosts. |
| Materials | Conversion | |
| Equivalent units of production | ||
| b. | Determine the cost per equivalent unit for materials andconversion costs. (Round your answers to 2 decimalplaces.) |
| Materials | Conversion | |
| Costper equivalent unit | $ | $ |
| c. | Determine the cost of ending work in process inventory.(Round your intermediate calculations to 2 decimal placesand final answer to the nearest dollar amount.) |
| Costof ending work in process inventory | $ |
| d. | Determine the cost of units transferred out of the departmentduring the month. (Round your intermediate calculations to2 decimal places and final answer to the nearest dollaramount.) |
| Costof units transferred out | $ |
