Question

During the first month of operations ended August 31, Kodiak Fridgeration Company manufactured 44,000 mini refrigerators, of which 39,000 were sold. Operating data for the month are summarized as follows:

1	Sales		$7,020,000.00
2	Manufacturing costs:
3	Direct materials	$3,080,000.00
4	Direct labor	1,056,000.00
5	Variable manufacturing cost	880,000.00
6	Fixed manufacturing cost	616,000.00	5,632,000.00
7	Selling and administrative expenses:
8	Variable	$663,000.00
9	Fixed	273,000.00	936,000.00

	Required:
1.	Prepare an income statement based on the absorption costing concept.*
2.	Prepare an income statement based on the variable costing concept.*
3.	Explain the reason for the difference in the amount of operating income reported in (1) and (2). * Be sure to complete the statement heading. Refer to the list of Labels and Amount Descriptions provided for the exact wording of the answer choices for text entries. A colon (:) will automatically appear if it is required. Enter amounts as positive numbers unless the amount is a calculation that results in a negative amount. For example: Net loss should be negative.

Labels and Amount Descriptions

Labels
August 31
Cost of goods sold
Fixed costs
For the Month Ended August 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, August 31
Loss from operations
Manufacturing margin
Planned contribution margin
Sales
Sales mix
Selling and administrative expenses
Total cost of goods sold
Total fixed costs
Total variable cost of goods sold
Variable cost of goods manufactured
Variable selling and administrative expenses

Absorption Costing Income Statement

1. Prepare an income statement based on the absorption costing concept. Be sure to complete the statement heading. Refer to the list of Labels and Amount Descriptions provided for the exact wording of the answer choices for text entries. A colon (:) will automatically appear if it is required. Enter amounts as positive numbers unless the amount is a calculation that results in a negative amount. For example: Net loss should be negative.

Kodiak Fridgeration Company

Absorption Costing Income Statement

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Variable Costing Income Statement

2. Prepare an income statement based on the variable costing concept. Be sure to complete the statement heading. Refer to the list of Labels and Amount Descriptions provided for the exact wording of the answer choices for text entries. A colon (:) will automatically appear if it is required. Enter amounts as positive numbers unless the amount is a calculation that results in a negative amount. For example: Net loss should be negative.

Kodiak Fridgeration Company

Variable Costing Income Statement

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Final Question

3. Explain the reason for the difference in the amount of operating income reported in (1) and (2).

The Operating income reported under     costing exceeds the Operating income reported under     costing, due to     manufacturing costs that are deferred to a future month under     costing.

Answer 1

Solution

Kodiak Fridgeration Company

1. Income statement based on the absorption costing concept:

Kodiak Fridgeration Company
Absorption Costing Income Statement
For the Month Ended August 31
Sales		$7,020,000
Cost of goods sold:
Cost of goods produced	$5,632,000
Less: ending inventory value	$640,000	$4,992,000
Gross Margin	2,028,000
Selling and administrative costs:
Variable	$663,000
Fixed	$273,000	$936,000
Net Income	$1,092,000

Computations:

Unit product cost –

Direct materials = 3,080,000/44,000 units = $70 per unit

Direct labor = $1,056,000/44,000 units = $24 per unit

Variable MOH = $880,000/44,000 units = $20 per unit

Fixed MOH = $616,000/44,000 = $14 per unit

Unit product cost = $128 per unit

Cost of goods produced = 44,000 units x $128 = $5,632,000

Ending inventory value = $128 x (44,000 – 39,000) = $640,000

2. Variable costing income statement –

Kodiak Fridgeration Company
Variable Costing Income Statement
Sales		$7,020,000
Variable cost of goods sold	$4,446,000
Gross Margin	$2,574,000
Variable selling expenses	$663,000
Contribution Margin	$1,911,000
Fixed costs:
Manufacturing overhead	$616,000
Selling a nd administration expenses	$273,000	$889,000
Net Income	$1,022,000

Computations:

Variable cost of goods sold –

Unit variable cost of goods produced –

Direct materials = 3,080,000/44,000 units = $70 per unit

Direct labor = $1,056,000/44,000 units = $24 per unit

Variable MOH = $880,000/44,000 units = $20 per unit

Unit variable cost = $114

Cost of goods sold = $114 x 39,000 units = $4,446,000

3. Reason for the difference in the amount of operating income reported in (1) and (2):

Reconciliation of the difference in net incomes computed under absorption costing concept and variable costing concept:

Variable costing net income	$1,022,000
Add: deferral of fixed overhead in ending inventory	$70,000	($14 x 5,000 = $70,000)
Absorption costing net income	$1,092,000