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23 July, 13:38

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 1,260,000.00Required:

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).

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  1. 23 July, 13:47
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    Absorption Costing Net Income 1008,000

    Variable Costing Net Income 976,000

    Explanation:

    Kodiak Fridgeration Company

    Units Produced = 80,000

    Units Sold = 72,000

    Ending Inventory = 8000

    Per Units Cost

    Direct materials $6,400,000/80,000 = $ 80

    Direct labor 1,600,000 / 80,000 = $ 20

    Variable manufacturing cost 1,280,000/80,000 = $ 16

    Fixed manufacturing cost 320,000 / 80,000 = $ 4

    Absorption Manufacturing Cost per unit = 9,600,000/80,000 = $ 120

    Variable Manufacturing Costs per unit = $ 116

    Kodiak Fridgeration Company

    Income Statement

    Absorption Costing

    Sales $10,800,000

    Manufacturing costs:

    Direct materials $6,400,000

    Direct labor 1,600,000

    Variable manufacturing cost 1,280,000

    Fixed manufacturing cost 320,000 9,600,000

    Less Ending Inventory (8000*120) (960,000)

    Cost of Goods Sold 86,40,000

    Gross Profit 2160,000

    Selling and administrative expenses:

    Variable $ 72,000 * 13.5 = 972,000

    Fixed 180,000

    Net Income 1008,000

    Kodiak Fridgeration Company

    Income Statement

    Variable Costing

    Sales $10,800,000

    Variable manufacturing cost

    (80,000*116) 9280,000

    Less Ending Inventory (8000*116) 928,000

    Cost of Goods Sold 83,52,000

    Gross Contribution Margin 2448,000

    Variable Selling and administrative expenses

    (72000 * $1,080,000/80,000) 972,000

    Contribution Margin 1476,000

    Less Fixed Expenses

    Fixed manufacturing cost 320,000

    Fixed 180,000 500,000

    Net Income 976,000

    3. The difference in absorption and variable costing income is because in absorption costing the fixed costs are treated as unit cost and in variable costs the fixed costs are treated as period costs. Also the fixed costs of the ending units is deducted in absorption costing where it is not deducted in variable costing.
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