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 1,260,000.00Required:

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).

Absorption Costing Net Income 1008,000

Variable Costing Net Income 976,000

Explanation:

Kodiak Fridgeration Company

Units Produced = 80,000

Units Sold = 72,000

Ending Inventory = 8000

Per Units Cost

Direct materials $6,400,000/80,000 = $ 80

Direct labor 1,600,000 / 80,000 = $ 20

Variable manufacturing cost 1,280,000/80,000 = $ 16

Fixed manufacturing cost 320,000 / 80,000 = $ 4

Absorption Manufacturing Cost per unit = 9,600,000/80,000 = $ 120

Variable Manufacturing Costs per unit = $ 116

Kodiak Fridgeration Company

Income Statement

Absorption Costing

Sales $10,800,000

Manufacturing costs:

Direct materials $6,400,000

Direct labor 1,600,000

Variable manufacturing cost 1,280,000

Fixed manufacturing cost 320,000 9,600,000

Less Ending Inventory (8000*120) (960,000)

Cost of Goods Sold 86,40,000

Gross Profit 2160,000

Selling and administrative expenses:

Variable $ 72,000 * 13.5 = 972,000

Fixed 180,000

Net Income 1008,000

Kodiak Fridgeration Company

Income Statement

Variable Costing

Sales $10,800,000

Variable manufacturing cost

(80,000*116) 9280,000

Less Ending Inventory (8000*116) 928,000

Cost of Goods Sold 83,52,000

Gross Contribution Margin 2448,000

Variable Selling and administrative expenses

(72000 * $1,080,000/80,000) 972,000

Contribution Margin 1476,000

Less Fixed Expenses

Fixed manufacturing cost 320,000

Fixed 180,000 500,000

Net Income 976,000

3. The difference in absorption and variable costing income is because in absorption costing the fixed costs are treated as unit cost and in variable costs the fixed costs are treated as period costs. Also the fixed costs of the ending units is deducted in absorption costing where it is not deducted in variable costing.