Question

During the first month of operations ended August 31, Kodiak Fridgeration Company manu- factured 80,000 mini refrigerators, of which 72,000 were sold. Operating data for the month are summarized as follows:

	Sales			107,800,000
	manufacturing costs
		direct materials	6,400,000
		direct labor	1,600,000
		variable mgf OH	1,280,000
		Fixed mfg OH	320,000
	Selling and admin			9,600,000
		variable	1,080,000
		Fixed	180,000
				1,260,000
Prepare an income statement based on the absorption costing concept.
Prepare an income statement based on the variable costing concept.
Explain the reason for the difference in the amount of income from operations reported in (1) and (2).

Answer 1

Solution 1:

Computation of Unit Product Cost - Absorption Costing
Particulars	Per unit
Unit Product Cost:
Direct material	$80.00
Direct Labor	$20.00
Variable manufacturing overhead	$16.00
Fixed manufacturing overhead ($320,000 / 80000)	$4.00
Unit Product Cost	$120.00

Income Statement - Absorption Costing - Kodiak Fridgeration Company
Particulars	Year 1
	Details	Amount
Sales		$107,800,000.00
Cost of Goods Sold:
Cost of goods produced	$9,600,000.00
Less: Ending Inventory	$960,000.00
Add: Opening Inventory	$0.00	$8,640,000.00
Gross Profit		$99,160,000.00
Variable Selling & Administrative Expenses		$1,080,000.00
Fixed Selling & Administrative Expenses		$180,000.00
Net Operating Income		$97,900,000.00

Solution 2:

Computation of Unit Product Cost - Variable Costing
Particulars	Per unit
Unit Product Cost:
Direct material	$80.00
Direct Labor	$20.00
Variable manufacturing overhead	$16.00
Unit product cost	$116.00

Income Statement - Variable Costing - Kodiak Fridgeration Company
Particulars	Amount
Sales	$107,800,000.00
Variable Costs:
Variable manufacturing Costs	$8,352,000.00
Variable Selling and administrative expenses	$1,080,000.00
Total Variable Costs	$9,432,000.00
Contribution Margin	$98,368,000.00
Fixed Expenses:
Fixed manufacturing overhead	$320,000.00
Fixed Selling & Administrative Expenses	$180,000.00
Net Operating Income	$97,868,000.00

Solution 3:

Reconciliation of Net Operating income under absorption costing & Variable Costing
Particulars	First year
Net Operating Income - Variable Costing	$97,868,000.00
Add : Fixed manufacturing overhead deferred in Ending inventory ($4*8000)	$32,000.00
Less: Fixed manufacturing overhead released in beginning inventory	$0.00
Net Operating Income - Absorption Costing	$97,900,000.00