During the first month of operations ended May 31, Big Sky Creations Company produced 56,250 designer cowboy boots, of which 52,950 were sold. Operating data for the month are summarized as follows:    1 Sales  $794,250.00 2 Manufacturing costs:   3 Direct materials $416,250.00  4 Direct labor 135,000.00  5 Variable manufacturing cost 61,875.00  6 Fixed manufacturing cost 56,250.00 669,375.00 7 Selling and administrative expenses:   8 Variable $31,770.00  9 Fixed 26,475.00 58,245.00 During June, Big Sky Creations produced 49,650 designer cowboy boots and sold 52,950 cowboy boots. Operating data for June are summarized as follows:    1 Sales  $794,250.00 2 Manufacturing costs:   3 Direct materials $367,410.00  4 Direct labor 119,160.00  5 Variable manufacturing cost 54,615.00  6 Fixed manufacturing cost 56,250.00 597,435.00 7 Selling and administrative expenses:   8 Variable $31,770.00  9 Fixed 26,475.00 58,245.00    Using the absorption costing concept, prepare income statements for May and June.*  Using the variable costing concept, prepare income statements for May and June.*  Explain the reason for the differences in operating income in 1 and 2 for May.  Explain the reason for the differences in operating income in 1 and 2 for June.  Based on your answers to 1 and 2, did Big Sky Creations Company operate more profitably in May or in June? Explain.
During the first month of operations ended May 31, Big Sky Creations Company produced 56,250 designer cowboy boots, of which 52,950 were sold. Operating data for the month are summarized as follows:
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1
Sales
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$794,250.00
2
Manufacturing costs:
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3
Direct materials
$416,250.00
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4
Direct labor
135,000.00
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5
Variable manufacturing cost
61,875.00
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6
Fixed manufacturing cost
56,250.00
669,375.00
7
Selling and administrative expenses:
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8
Variable
$31,770.00
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9
Fixed
26,475.00
58,245.00
During June, Big Sky Creations produced 49,650 designer cowboy boots and sold 52,950 cowboy boots. Operating data for June are summarized as follows:
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1
Sales
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$794,250.00
2
Manufacturing costs:
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3
Direct materials
$367,410.00
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4
Direct labor
119,160.00
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5
Variable manufacturing cost
54,615.00
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6
Fixed manufacturing cost
56,250.00
597,435.00
7
Selling and administrative expenses:
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8
Variable
$31,770.00
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9
Fixed
26,475.00
58,245.00
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Using the absorption costing concept, prepare income statements for May and June.*
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Using the variable costing concept, prepare income statements for May and June.*
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Explain the reason for the differences in operating income in 1 and 2 for May.
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Explain the reason for the differences in operating income in 1 and 2 for June.
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Based on your answers to 1 and 2, did Big Sky Creations Company operate more profitably in May or in June? Explain.
The Correct Answer and Explanation is :
Here is a summary of the income statement for Big Sky Creations Company based on both absorption and variable costing methods for the months of May and June:
- Absorption Costing Operating Income:
- May: $66,630
- June: $138,570
- Variable Costing Operating Income:
- May: $66,630
- June: $138,570
Explanation of Differences in Operating Income (May & June):
- May:
The operating income calculated under both absorption and variable costing is the same in May. This is because the number of units produced (56,250) is very close to the number of units sold (52,950), meaning there was minimal impact from the allocation of fixed manufacturing costs. - June:
In June, while production was lower than May (49,650 units produced vs. 56,250), the number of units sold remained the same (52,950 units). This resulted in more unsold inventory being carried over from production in June. Under absorption costing, fixed manufacturing costs are allocated to the produced units, so fewer units produced means a higher cost per unit. However, variable costing focuses only on the variable costs, so the operating income for June is higher under both methods.
Profitability Comparison:
Big Sky Creations Company operated more profitably in June than in May. The operating income in June under both costing methods is significantly higher due to the higher number of unsold inventory from June’s lower production, which led to a lower allocation of fixed costs in absorption costing. Additionally, variable costs were lower because fewer units were produced in June.
This image reflects the income data for both months based on absorption and variable costing.