During the first month of operations ended August 31, Kodiak Fridgeration Company manufactured 60,000 mini refrigerators, of which 54,000 were sold. Operating data for the month are summarized as follows: Sales $10,260,000.00
Manufacturing costs:
Direct materials $5,100,000.00
Direct labor 1,800,000.00
Variable manufacturing cost 1,200,000.00
Fixed manufacturing cost 840,000.00 8,940,000.00
Selling and administrative expenses:
Variable $972,000.00 324,000.00
Fixed 1,296,000.00
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 operating income reported in (1) and (2). Refer to the list of Labels and Amount Descriptions provided
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
Operating income
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 fixed costs
Total variable cost of goods sold
Variable cost of goods manufactured
Variable selling and administrative expenses

Kodiak Fridgeration Company

1. Income Statement for the month ended August 31, absorption costing concept:

Sales                                                            $10,260,000.00

Manufacturing costs:

Direct materials                    $5,100,000.00

Direct labor                             1,800,000.00

Variable manufacturing cost 1,200,000.00

Fixed manufacturing cost        840,000.00

Total manufacturing             8,940,000.00

Less Ending Inventory             894,000.00   8,046,000.00

Gross profit                                                    $2,214,000.00

Selling and administrative expenses:

Variable         $972,000.00

Fixed               324,000.00                              1,296,000.00

Net Income                                                       $918,000.00

2. Income Statement for the month ended August 31, absorption costing concept:

Sales                                                            $10,260,000.00

Manufacturing costs:

Direct materials                    $5,100,000.00

Direct labor                             1,800,000.00

Variable manufacturing cost 1,200,000.00  

Total manufacturing              8,100,000.00

Less Ending Inventory              810,000.00   7,290,000.00

Gross profit                                                    $2,970,000.00

Fixed manufacturing cost        840,000.00

Selling and administrative expenses:

Variable                                    972,000.00

Fixed                                        324,000.00    2,136,000.00

Net Income                                                      $834,000.00

3. The reason for the difference in the amount of operating income reported in (1) and (2) are the cost of products assigned to cost of goods sold and ending inventory  are not the same.  The following reconciliation buttresses this point:

Net operating income as per absorption costing $918,000.00

less Ending inventory, ($149 - $135) x 6,000           84,000.00

Net operating income as per variable costing    $834,000.00

Explanation:

a) Data and Calculations:

Units produced = 60,000

Units sold = 54,000

Ending inventory = 6,000

Sales $10,260,000.00

Manufacturing costs:

Direct materials $5,100,000.00

Direct labor 1,800,000.00

Variable manufacturing cost 1,200,000.00

Fixed manufacturing cost 840,000.00 8,940,000.00

Selling and administrative expenses:

Variable $972,000.00 324,000.00

Fixed 1,296,000.00

Kodiak's absorption costing concept incorporates all production costs into the cost of products.  This means that the cost of production includes all variable and fixed costs associated with production.  Costs that are not related to production are treated as period costs.  Whereas, with variable costing technique, only the variables costs of production are included in the costs of production.  All fixed costs, including factory overheads are treated as period costs.

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