During the first month of operations ended July 31 Western C

During the first month of operations ended July 31, Western Creations Company produced 80,000 designer cowboy hats, of which 72,000 were sold. Operating data for the month are summarized as follows:

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 cowboy hats and sold 72,000 cowboy hats. Operating data for August are summarized 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

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

Solution

1. Income statement using Absorption costing for July

Working notes:

Cost of goods sold = opening stock + cost of goods manufactured - closing stock

= 0 + 3600000 - 360000

= 3240000

closing stock = number of units * manufacturing cost per unit

= 8000*45 = 36000

Income statement for August using Absorption costing

Working notes:

COGS = 36000 + 2944000 - 368000 = 29,36,000

2) Income statement for July using Variable costing

Income statement for August using variable costing

3a) The income from operations for July is higher by $17600. This is becuase of the difference in the cost of goods sold. The difference is due to the fixed costs of manufacturing. under absorption costing, the fixed expenses have been absorbed based on the number of units sold and not the entire units produced whereas under variable costing the total fixed costs for the month have been taken into consideration.

3b) The income from operations for August is higher by $8000. This is again becuase of the reason mentioned above. under absorption costing, the opening stock of inventory and closing stock of inventory have been considered which have reduced the fixed expenses to the units sold rather than taking the entire fixed manufactuirng expenses like that in variable costing.

4. Western Creations operated more profitably in August as the profits percentage is higher.

	$
Sales	43,20,000
COGS	32,40,000
Gross margin	10,80,000
Selling and admin expenses	1,69,000
Net income	9,11,000