Question

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

1	Sales		$10,800,000.00
2	Manufacturing costs:
3	Direct materials	$6,400,000.00
4	Direct labor	1,600,000.00
5	Variable manufacturing cost	1,280,000.00
6	Fixed manufacturing cost	320,000.00	9,600,000.00
7	Selling and administrative expenses:
8	Variable	$1,080,000.00
9	Fixed	180,000.00	1,260,000.00

	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 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
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

Absorption Costing Income Statement

Shaded cells have feedback.

1. Prepare an income statement based on the absorption costing concept. 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.

Score: 64/64

Kodiak Fridgeration Company

Absorption Costing Income Statement

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1	✔		✔
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8	✔		✔

Points:

16 / 16

Feedback

Check My Work

Sales - (Cost of Goods Manufactured - Ending Inventory*) = Gross Profit; Gross Profit - Selling and Administrative Expenses = Income from Operations.

* (Manufactured Units - Sold Units) x (Total Manufacturing Costs/Manufactured Units)

Variable Costing Income Statement

Shaded cells have feedback.

2. Prepare an income statement based on the variable costing concept. 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.

Score: 95/106

Kodiak Fridgeration Company

Variable Costing Income Statement

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1	✔		✔
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7	✔		✔
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10	✔	✔
11	✔	✔
12	✔		✔
13	✔		✔

Points:

22.41 / 25

Feedback

Check My Work

Sales - Variable Cost of Goods Sold* = Manufacturing Margin; Manufacturing Margin - Variable Selling and Administrative Expenses = Contribution Margin; Contribution Margin - (Fixed Manufacturing Costs + Fixed Selling and Administrative Expenses) = Income from Operations.

*Variable Cost of Goods Sold = Variable Cost of Goods Manufactured - [(Manufactured Units - Sold Units) x (Variable Manufacturing Costs/Manufactured Units)]

Final Question

Shaded cells have feedback.

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

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.

Points:

4 / 4

Feedback

Check My Work

Recall that fixed factory overhead costs are considered a period expense under variable costing.

Please fully complete calculations and explain the step by step calculations process.

Answer 1

• All working forms part of the answer
• All amounts are in $, except units
• Working

Direct materials	6400000
Direct Labor	1600000
Variable manufacturing cost	1280000
Fixed manufacturing cost	320000
Total manufacturing cost	$9600000
Total units manufactured	80000
manufacturing cost per unit	$120

Total manufacturing cost	$9600000
(-) Ending Inventory cost	[8000 units x $120] 960000
Cost of Goods Sold	$8640000

• Income Statement – Absorption Costing

Sales	10800000
Less: Cost of Goods Sold	8640000
Gross Profit	$2160000
Less: Selling & Administrative expenses
Variable	1080000
Fixed	180000
Operating Income	$900000

• Income Statement – Variable costing

Sales	10800000
Less: Variable Costs
Direct materials	6400000
Direct labor	1600000
Manufacturing cost	1280000
Selling & administrative cost	1080000
Total variable cost	10360000
Contribution margin	440000
Less: Fixed Cost
Manufacturing cost	320000
Selling & administrative cost	180000
Total Fixed Cost	500000
Operating Income	$(60000)

• Reason of Difference as to why there is $900000 income under absorption method and $(60000) under variable costing method.

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.

Fixed factory overhead costs are considered a period expense under variable costing.