Question

During the first month of operations ended August 31, Kodiak Fridgeration Company manufactured 40,000 mini refrigerators, of which 36,000 were sold. Operating data for the month are summarized as follows:

1	Sales		$8,280,000.00
2	Manufacturing costs:
3	Direct materials	$2,800,000.00
4	Direct labor	1,200,000.00
5	Variable manufacturing cost	800,000.00
6	Fixed manufacturing cost	440,000.00	5,240,000.00
7	Selling and administrative expenses:
8	Variable	$540,000.00
9	Fixed	216,000.00	756,000.00

	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 income from operations reported in (1) and (2). * Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if required. Enter Inventory, August 31 as a negative number using a minus sign. If a net loss is incurred, enter that amount as a negative number using a minus sign. 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 Income from operations 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

Answer 1

Kodiak Fridgeration Company
Absorption Costing Income Statement
For the Month Ended August 31
Sales		$8,280,000.00
Cost of goods Sold:
Cost of Goods Manufactured	$5,240,000.00
Inventory, August 31                   [Refer working note 1]	($524,000.00)
Total cost of goods sold		$4,716,000.00
Gross Margin                               [Sales - Cost of goods sold]		$3,564,000.00
Selling and administrativeExpense		$756,000.00
Income from operations              [$3,564,000 - $756,000]		$2,808,000.00

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Kodiak Fridgeration Company
Variable Costing Income Statement
For the Month Ended August 31
Sales		$8,280,000.00
Variable cost of goods sold:
Variable cost of goods manufactured            [Refer working note 2]	$4,800,000.00
Inventory, August 31                                     [Refer working note 3]	($480,000.00)
Variable cost of goods sold		$4,320,000.00
Manufacturing Margin                                           [Sales - Variable cost of goods sold]		$3,960,000.00
Variable selling and administrative expenses		$540,000.00
Contribution Margin                                             [$3,960,000 - $540,000]		$3,420,000.00
Fixed costs:
Fixed manufacturing costs	$440,000.00
Fixed selling and Administrative Expenses	$216,000.00
Total fixed costs		$656,000.00
Income from operations                                      [$3,420,000 - $656,000]		$2,764,000.00

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3. The Income from operations reported under absorption costing exceeds the income from operations reported under variable costing by the difference between the two, due to fixed manufacturing costs that are deferred to a future month under absorption costing.

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Working note 1 - Computation of value of ending inventory on August 31 under absorption costing
Direct material cost	$2,800,000
Add: Direct labor cost	$1,200,000
Add: Variable manufacturing overhead	$800,000
Add: Fixed manufacturing cost	$440,000
Total cost of production                                                                                                      (a)	$5,240,000
Number of units produced                                                                                                     (b)	$40,000
Cost per unit                                                                                                                          (c = a / b)	$131
Number of units in ending inventory    [Production - Sales = 40,000 units - 36,000 units]    (d)	4,000
Value of ending inventory on August 31                                                                                  (c x d)	$524,000

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Working note 2 - Computation of value of variable cost of goods manufactured
Direct material cost	$2,800,000
Add: Direct labor cost	$1,200,000
Add: Variable manufacturing overhead	$800,000
Variable cost of goods manufactured	$4,800,000

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Working note 3 - Computation of value of ending inventory on August 31 under variable costing
Direct material cost	$2,800,000
Add: Direct labor cost	$1,200,000
Add: Variable manufacturing overhead	$800,000
Variable cost of production                                                                                                 (a)	$4,800,000
Number of units produced                                                                                                     (b)	$40,000
Cost per unit                                                                                                                          (c = a / b)	$120
Number of units in ending inventory    [Production - Sales = 40,000 units - 36,000 units]    (d)	4,000
Value of ending inventory on August 31                                                                                  (c x d)	$480,000