During the first month of operations ended May 31, Big Sky Creations Company produced 40,000 designer cowboy boots, of which 36,000 were sold. Operating data for the month are summarized as follows: 1 Sales $4,500,000.00 2 Manufacturing costs: 3 Direct materials $960,000.00 4 Direct labor 2,000,000.00 5 Variable manufacturing cost 520,000.00 6 Fixed manufacturing cost 120,000.00 3,600,000.00 7 Selling and administrative expenses: 8 Variable $72,000.00 9 Fixed 80,000.00 152,000.00 During June, Big Sky Creations produced 32,000 designer cowboy boots and sold 36,000 cowboy boots. Operating data for June are summarized as follows: 1 Sales $4,500,000.00 2 Manufacturing costs: 3 Direct materials $768,000.00 4 Direct labor 1,600,000.00 5 Variable manufacturing cost 416,000.00 6 Fixed manufacturing cost 120,000.00 2,904,000.00 7 Selling and administrative expenses: 8 Variable $72,000.00 9 Fixed 80,000.00 152,000.00 Required: 1. Using the absorption costing concept, prepare income statements for (a) May and (b) June. 2. Using the variable costing concept, prepare income statements for (a) May and (b) June. 3a. Explain the reason for the differences in operating income in (1) and (2) for May. 3b. Explain the reason for the differences in operating income in (1) and (2) for June. 4. Based on your answers to (1) and (2), did Big Sky Creations Company operate more profitably in May or in June? Explain. Labels June 30 Cost of goods sold Fixed costs For the Month Ended June 30 For the Month Ended May 31 May 31 Variable cost of goods sold Amount Descriptions Contribution margin Contribution margin ratio Cost of goods manufactured Fixed manufacturing costs Fixed selling and administrative expenses Gross profit Operating income Inventory, June 1 Inventory, May 31 Operating loss Manufacturing margin Planned contribution margin Sales Sales mix Selling and administrative expenses Total cost of goods sold Total fixed costs Absorption Costing Income Statement-May 1a. Using the absorption costing concept, prepare income statements for May. Income Statement Instructions Big Sky Creations Company Absorption Costing Income Statement 1 2 3 4 5 6 7 8 Variable Costing Income Statement-May 2a. Using the variable costing concept, prepare income statements for May. Income Statement Instructions Big Sky Creations Company Variable Costing Income Statement 1 2 3 4 5 6 7 8 9 10 11 12 13 Variable Costing Income Statement-June 2b. Using the variable costing concept, prepare income statements for June. Income Statement Instructions Big Sky Creations Company Variable Costing Income Statement 1 2 3 4 5 6 7 8 9 10 11 12 13 Final Questions 3a. Explain the reason for the differences in operating income in (1) and (2) for May. For May, operating income reported under costing exceeds that reported under costing due to part of manufacturing costs that are expensed on the costing income statement, but not on the costing income statement. 3b. Explain the reason for the differences in operating income in (1) and (2) for June. For June, operating income reported under costing is less than that reported under costing due to part of manufacturing costs from May that are expensed on the costing income statement, but not on the costing income statement. 4. Based on your answers to (1) and (2), did Big Sky Creations Company operate more profitably in May or in June? Explain. Big Sky Creations Company was under the variable costing concept. The difference in operating income reported under the absorption costing concept is due to allocating to the .

During the first month of operations ended May 31, Big Sky Creations Company produced 40,000 designer cowboy boots, of which 36,000 were sold. Operating data for the month are summarized as follows: 1 Sales $4,500,000.00 2 Manufacturing costs: 3 Direct materials $960,000.00 4 Direct labor 2,000,000.00 5 Variable manufacturing cost 520,000.00 6 Fixed manufacturing cost 120,000.00 3,600,000.00 7 Selling and administrative expenses: 8 Variable $72,000.00 9 Fixed 80,000.00 152,000.00 During June, Big Sky Creations produced 32,000 designer cowboy boots and sold 36,000 cowboy boots. Operating data for June are summarized as follows: 1 Sales $4,500,000.00 2 Manufacturing costs: 3 Direct materials $768,000.00 4 Direct labor 1,600,000.00 5 Variable manufacturing cost 416,000.00 6 Fixed manufacturing cost 120,000.00 2,904,000.00 7 Selling and administrative expenses: 8 Variable $72,000.00 9 Fixed 80,000.00 152,000.00 Required: 1. Using the absorption costing concept, prepare income statements for (a) May and (b) June. 2. Using the variable costing concept, prepare income statements for (a) May and (b) June. 3a. Explain the reason for the differences in operating income in (1) and (2) for May. 3b. Explain the reason for the differences in operating income in (1) and (2) for June. 4. Based on your answers to (1) and (2), did Big Sky Creations Company operate more profitably in May or in June? Explain. Labels June 30 Cost of goods sold Fixed costs For the Month Ended June 30 For the Month Ended May 31 May 31 Variable cost of goods sold Amount Descriptions Contribution margin Contribution margin ratio Cost of goods manufactured Fixed manufacturing costs Fixed selling and administrative expenses Gross profit Operating income Inventory, June 1 Inventory, May 31 Operating loss Manufacturing margin Planned contribution margin Sales Sales mix Selling and administrative expenses Total cost of goods sold Total fixed costs Absorption Costing Income Statement-May 1a. Using the absorption costing concept, prepare income statements for May. Income Statement Instructions Big Sky Creations Company Absorption Costing Income Statement 1 2 3 4 5 6 7 8 Variable Costing Income Statement-May 2a. Using the variable costing concept, prepare income statements for May. Income Statement Instructions Big Sky Creations Company Variable Costing Income Statement 1 2 3 4 5 6 7 8 9 10 11 12 13 Variable Costing Income Statement-June 2b. Using the variable costing concept, prepare income statements for June. Income Statement Instructions Big Sky Creations Company Variable Costing Income Statement 1 2 3 4 5 6 7 8 9 10 11 12 13 Final Questions 3a. Explain the reason for the differences in operating income in (1) and (2) for May. For May, operating income reported under costing exceeds that reported under costing due to part of manufacturing costs that are expensed on the costing income statement, but not on the costing income statement. 3b. Explain the reason for the differences in operating income in (1) and (2) for June. For June, operating income reported under costing is less than that reported under costing due to part of manufacturing costs from May that are expensed on the costing income statement, but not on the costing income statement. 4. Based on your answers to (1) and (2), did Big Sky Creations Company operate more profitably in May or in June? Explain. Big Sky Creations Company was under the variable costing concept. The difference in operating income reported under the absorption costing concept is due to allocating to the .

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

During the first month of operations ended May 31, Big Sky Creations Company produced 40,000 designer cowboy boots, of which 36,000 were sold. Operating data for the month are summarized as follows:

1	Sales		$4,500,000.00
2	Manufacturing costs:
3	Direct materials	$960,000.00
4	Direct labor	2,000,000.00
5	Variable manufacturing cost	520,000.00
6	Fixed manufacturing cost	120,000.00	3,600,000.00
7	Selling and administrative expenses:
8	Variable	$72,000.00
9	Fixed	80,000.00	152,000.00

During June, Big Sky Creations produced 32,000 designer cowboy boots and sold 36,000 cowboy boots. Operating data for June are summarized as follows:

1	Sales		$4,500,000.00
2	Manufacturing costs:
3	Direct materials	$768,000.00
4	Direct labor	1,600,000.00
5	Variable manufacturing cost	416,000.00
6	Fixed manufacturing cost	120,000.00	2,904,000.00
7	Selling and administrative expenses:
8	Variable	$72,000.00
9	Fixed	80,000.00	152,000.00

	Required:
1.	Using the absorption costing concept, prepare income statements for (a) May and (b) June.
2.	Using the variable costing concept, prepare income statements for (a) May and (b) June.
3a.	Explain the reason for the differences in operating income in (1) and (2) for May.
3b.	Explain the reason for the differences in operating income in (1) and (2) for June.
4.	Based on your answers to (1) and (2), did Big Sky Creations Company operate more profitably in May or in June? Explain.

Labels
June 30
Cost of goods sold
Fixed costs
For the Month Ended June 30
For the Month Ended May 31
May 31
Variable cost of goods sold
Amount Descriptions
Contribution margin
Contribution margin ratio
Cost of goods manufactured
Fixed manufacturing costs
Fixed selling and administrative expenses
Gross profit
Operating income
Inventory, June 1
Inventory, May 31
Operating loss
Manufacturing margin
Planned contribution margin
Sales
Sales mix
Selling and administrative expenses
Total cost of goods sold
Total fixed costs

Absorption Costing Income Statement-May

1a. Using the absorption costing concept, prepare income statements for May.

Income Statement Instructions

Big Sky Creations Company

Absorption Costing Income Statement

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Variable Costing Income Statement-May

2a. Using the variable costing concept, prepare income statements for May.

Income Statement Instructions

Big Sky Creations Company

Variable Costing Income Statement

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Variable Costing Income Statement-June

2b. Using the variable costing concept, prepare income statements for June.

Income Statement Instructions

Big Sky Creations Company

Variable Costing Income Statement

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Final Questions

3a. Explain the reason for the differences in operating income in (1) and (2) for May.

For May, operating income reported under costing exceeds that reported under costing due to part of manufacturing costs that are expensed on the costing income statement, but not on the costing income statement.

3b. Explain the reason for the differences in operating income in (1) and (2) for June.

For June, operating income reported under costing is less than that reported under costing due to part of manufacturing costs from May that are expensed on the costing income statement, but not on the costing income statement.

4. Based on your answers to (1) and (2), did Big Sky Creations Company operate more profitably in May or in June? Explain.

Big Sky Creations Company was under the variable costing concept. The difference in operating income reported under the absorption costing concept is due to allocating to the .

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