Question

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:

1	Sales		$10,260,000.00
2	Manufacturing costs:
3	Direct materials	$5,100,000.00
4	Direct labor	1,800,000.00
5	Variable manufacturing cost	1,200,000.00
6	Fixed manufacturing cost	840,000.00	8,940,000.00
7	Selling and administrative expenses:
8	Variable	$972,000.00
9	Fixed	324,000.00	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 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.

Answer 1

Answer-1)-

Kodiak Fridgeration
Contribution Margin statement (Using absorption costing approach)
Particulars			Amount
			$
Sales (a)			10260000
Less:- Cost of goods sold (b)
Opening inventory
Add:- Cost of goods manufatured		8940000
Direct materials		5100000
Direct labor		1800000
Variable factory overhead		1200000
Fixed factory overhead		840000
Cost of goods available for sale		8940000
Less:- Closing inventory	6000 units*$149 per unit	894000	8046000
Gross margin C= a-b			2214000
Less:-Variable selling & administrative exp.			972000
Less:- Fixed costs
Selling & administrative exp.			324000
Net Income			918000

Explanation- Unit product cost under Absorption costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=($5100000+$1800000+$1200000+$840000)/60000 units

= $149 per unit

2)-

Kodiak Fridgeration
Contribution Margin statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)			10260000
Less:- Variable cost of goods sold (b)
Opening inventory
Add:- Variable cost of goods manufatured		8100000
Direct materials		5100000
Direct labor		1800000
Variable factory overhead		1200000
Variable cost of goods available for sale		8100000
Less:- Closing inventory	6000 units*$135 per unit	810000	7290000
Gross contribution margin C= a-b			2970000
Less:-Variable selling & administrative exp.			972000
Contribution margin			1998000
Less:- Fixed costs
Manufacturing overhead			840000
Selling & administrative exp.			324000
Net Income			834000

Explanation- Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead + fixed manufacturing overhead

=($5100000+$1800000+$1200000)/60000 units

= $135 per unit

3)-Under the absorption costing method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under variable costing all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory increases, the absorption costing income statement will have a higher Operating income than will the variable costing income statement