Question

and learning Show Me How During the first month of operations ended August 31, Kodiak ridgeration Company manutactured 80,000 mini rerigerators, of which 72,000 wene soid. Operating dats for the morth are as tollows: Sales Manufacturing costs Deect materials Direct labor 10,800,0000 1,6000000 1,280000.00 20000.00 9,600,000.00 Fxed mansfacturing cos Selling and adninistrative esxpense: Variable Fie 1,080000 D0 Required 1 Prepare an income statement based on the absorption costing concept 2Prepare an income statement based on the variable costing concpt 3 Explain me reason for the difivence in the amount of income from operations reported in () and MacBook Air 心m

Answer 1

1) Income Statement based on the absorption costing concept (Amount in $'000)

Sales (A)		10,800
Cost of goods sold:
Direct materials [(6,400/80,000)*72,000]	5,760
Direct Labor [(1,600/80,000)*72,000]	1,440
Variable manufacturing cost [(1,280/80,000)*72,000]	1,152
Fixed manufacturing cost [(320/80,000)*72,000]	288
Total Cost of goods sold (B)		8,640
Gross Profit (A-B)		2,160
Less: Selling and Administrative Expenses
Variable		(1,080)
Fixed		(180)
Net Income		900

Working Notes:-

1) For easy calculation, I had rounded all the figures in '000 $.

2) All the manufacturing costs such as direct materials, direct labor and manufacturing overhead given in the question are for 80,000 units and these amounts are need to be converted into cost for 72,000 units sold. Therefore all the manufacturing costs are divided by 80,000 units and multiplied by 72,000 units to calculate cost of good sold.

2) Income Statement based on the variable costing concept (Amount in $'000)

Sales (A)		10,800
Variable costs:
Direct Materials [(6,400/80,000)*72,000]	5,760
Direct Labor [(1,600/80,000)*72,000]	1,440
Variable manufacturing cost [(1,280/80,000)*72,000]	1,152
Variable selling and administrative expenses	1,080
Total Variable costs (B)		9,432
Contribution (A-B)		1,368
Less: Fixed costs
Fixed manufacturing cost		(320)
Fixed Selling and Administrative Expenses		(180)
Net Income		868

3) There is a difference of $32,000 ($900,000 - $868,000) in the net income shown between absorption costing income statement and variable costing income statement. The reason for this difference is that fixed manufacturing cost is included in unit product cost in the absorption costing income statement and considered as a part of product cost whereas in variable costing income statement fixed manufacturing cost is considered as period cost.

Therefore the $32,000 of fixed manufactuirng cost are included in Cost of inventory of 8,000 units in absorption costing income statement hence resulted in higher net income of $32,000 in absorption costing income statement.