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

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.

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. 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.

Kodiak Fridgeration Company

Variable Costing Income Statement

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Answer 1

• All working forms part of the answer
• Amounts are in $
• Under variable costing, fixed overheads don’t form part of the cost of the product.
• Answer: Manufacturing cost under both the method of costing

	Manufacturing cost per unit
	Under Variable Costing	Under Absorption Costing
Direct materials [total / 80000 units produced]	80	80
Direct labor [total / 80000 units produced]	20	20
Variable manufacturing overhead [total / 80000 units produced]	16	16
Fixed Manufacturing Overhead per unit [total / 80000 units produced]		4
Total manufacturing cost per unit	$116	$120

• Requirement 1: variable Costing Income Statement

	Amount ($)		Working
Sales		10800000	given
Direct materials	5760000		72000x80
Direct labor	1440000		72000x20
Variable manufacturing cost	1152000		72000x16
Variable selling & administrative expense	1080000	9432000	[given & total]
Contribution margin		$1368000	10800000-9432000
Fixed manufacturing Overhead	320000		[given]
Fixed selling & administrative expenses	180000	500000	[given]
Net Income (Loss)		$868000	1368000-500000

• Requirement 2: Absorption costing Income Statement

	Amount ($)		Working
Sales		10800000	given
Cost of Goods Sold		8640000	72000x120
Gross Margin		$2160000	10800000-864000
variable selling & administrative expenses	1080000		given
Fixed selling & administrative expenses	180000		given
		1260000
Net Income		$900000	2160000-1260000

• Requirement 3:

Net Income under (2) Absorption costing is MORE than income under (1) variable costing because under Absorption costing, Fixed manufacturing overheads are deferred to future periods in the form of closing stock value.

Ending Inventory = 8000 units
manufacturing cost difference = $4 per unit [120-116]
Total = 8000 units x $4 = $32000

Income under Absorption costing = $900,000
Income under variable costing =      $868,000
Difference in incomes = $32,000