Question

During the first month of operations ended August 31, Kodiak Fridgeration Company manufactured 48,000 mini refrigerators, of which 44,000 were sold. Operating data for the month are summarized as follows:

1 Sales $8,800,000.00

2 Manufacturing costs:
3 Direct materials $3,360,000.00
4 Direct labor 1,344,000.00
5 Variable manufacturing cost 816,000.00
6 Fixed manufacturing cost 528,000.00 6,048,000.00 7

Selling and administrative expenses:
8 Variable $528,000.00
9 Fixed 352,000.00 880,000.00

Required:
a. Prepare an income statement based on the absorption costing concept.
b. Prepare an income statement based on the variable costing concept.
c. Explain the reason for the difference in the amount of income from operations reported in (1) and (2).

Answer 1

The income statement based on the absorption costing concept is $1,872,000 for income from operations. The income statement based on the variable costing concept is $2,400,000 for income from operations. The difference in income from operations is due to the inclusion of fixed manufacturing costs in the absorption costing concept.

Step-by-step explanation:

To prepare an income statement based on the absorption costing concept, we need to include all manufacturing costs, both variable and fixed, in the cost of goods sold. The income statement would be as follows:

1. Sales: $8,800,000
2. Cost of goods sold: $3,360,000 (direct materials) + $1,344,000 (direct labor) + $816,000 (variable manufacturing cost) + $528,000 (fixed manufacturing cost) = $6,048,000
3. Gross profit: $8,800,000 - $6,048,000 = $2,752,000
4. Selling and administrative expenses: $528,000 (variable) + $352,000 (fixed) = $880,000
5. Income from operations: $2,752,000 - $880,000 = $1,872,000

To prepare an income statement based on the variable costing concept, we only include variable manufacturing costs in the cost of goods sold. The income statement would be as follows:

1. Sales: $8,800,000
2. Cost of goods sold: $3,360,000 (direct materials) + $1,344,000 (direct labor) + $816,000 (variable manufacturing cost) = $5,520,000
3. Gross profit: $8,800,000 - $5,520,000 = $3,280,000
4. Selling and administrative expenses: $528,000 (variable) + $352,000 (fixed) = $880,000
5. Income from operations: $3,280,000 - $880,000 = $2,400,000

The difference in the amount of income from operations reported in the two income statements is due to the inclusion of fixed manufacturing costs in the absorption costing concept. These fixed costs are allocated to the cost of goods sold in absorption costing, resulting in a lower gross profit and income from operations compared to variable costing.

Answer 2

Part a.

Income statement based on the absorption costing concept.

Sales $8,800,000.00

Less Cost of Sales

Beginning Inventory $0

Add Manufacturing Cost $6,048,000.00

Less Ending Inventory ($504,000.00) ($5,544,000.00)

Gross Profit $3,256,000.00

Less Expenses :

Selling and administrative expenses:

Variable $528,000.00

Fixed $352,000.00 ($880,000.00)

Net Income/(loss) $2,376,000.00

Part b.

Income statement based on the variable costing concept.

Sales $8,800,000.00

Less Cost of Sales

Beginning Inventory $0

Add Manufacturing Cost $5,520,000.00

Less Ending Inventory ($460,000.00) ($5,060,000.00)

Contribution $3,740,000.00

Less Expenses :

Fixed manufacturing cost $528,000.00

Selling and administrative expenses:

Variable $528,000.00

Fixed $352,000.00 ($1,408,000.00)

Net Income/(loss) $2,332,000.00

Part c.

Reason : Fixed Costs deferred in Ending Inventory in Absorption Costing has resulted in a higher Income.

Step-by-step explanation:

Units in Ending Inventory Calculation :

Production 48,000

Less Sales (44,000)

Ending Inventory 4,000

Absorption Costing Calcs

Variable Manufacturing Costs

Direct materials $3,360,000.00

Direct labor $1,344,000.00

Variable manufacturing cost $816,000.00

Fixed manufacturing cost $528,000.00

Total $6,048,000.00

Ending Inventory = $6,048,000.00 × 4,000 / 48,000

= $504,000

Variable Costing Calcs

Variable Manufacturing Costs

Direct materials $3,360,000.00

Direct labor $1,344,000.00

Variable manufacturing cost $816,000.00

Total $5,520,000.00

Ending Inventory = $5,520,000.00 × 4,000 / 48,000

= $460,000