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).

Answer 1

Answer:

1.                     Absorption Costing Income Statement

                         For the month ended May 31, 2016

Sales                                                                     $10,800,000

Cost of goods sold

Beginning inventory                   -

Cost of goods manufactured    $9,600,000

Ending Inventory                         $960,000

Cost of goods sold                                                $8,640,000

Gross margin                                                          $2,160,000

Selling and administrative expenses

$1,080,000 + $180,000                                         $1,260,000

Income from operation                                           $900,000

2.             Variable Costing Income Statement

               For the month ended May 31, 2016

Sales                                                                            $10,800,000

Variable cost of goods sold

Beginning Inventory                     -

Variable cost of goods manufactured $9,280,000

Ending Inventory                                    $928,000

Variable cost of goods sold                                        $8,352,000

Manufacturing margin                                                  $2,448,000

Variable selling and administrative                             $1,080,000

expenses

Contribution margin                                                     $1,368,000

Fixed Cost:

Fixed manufacturing cost                        $320,000

Fixed selling and administrative              $180,000

expenses

Total fixed cost                                                                $500,000

Income from operation                                                  $868,000

3. The reason for difference of amount for income from operation is $32,000 ($900,000 - $868,000). It is due to fixed manufacturing cost which is included for ending inventory under absorption costing (320,000 / 80,000 * 8,000). Hence, income under absorption costing is higher by $32,000 as compared to income under variable costing.