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Preparing the company’s income statement under absorption costing.


During the first year of operations , Greenwood Village Fridge Company manufactured 40,000 mini refrigerators, of which 36,000 were sold. Operating data for the year are summarized as follows:

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $6,480,000


Manufacturing cost:


Cost of goods manufactured including:


Direct materials. . . . . . . ………………………. 3,200,000


Direct labor . . . . . ……… ………………………..1,120,000


Variable manufacturing overhead. . . . . . .  880,000


Fixed manufacturing overhead . . . . ………560,000


Variable Selling and administrative expenses . . . . . . .  648,000


Fixed Selling and administrative expenses …………………288,000




1.Prepare the company’s income statement under absorption costing.

2.Prepare the company’s income statement under variable costing.

3.Explain any difference between the company’s income under costing from parts a and b above.

4.Grande Sonido is a merchandising company specializing in home computer speakers. The company budgets its monthly cost of goods sold to equal 70% of sales. Its inventory policy calls for ending inventory in each month to equal 20% of the next month’s budgeted cost of goods sold. All purchases are on credit, and 25% of the purchases in a month is paid for in the same month. Another 60% is paid for during the first month after purchase, and the remaining 15% is paid for in the second month after purchase. The following sales budgets are set: July, $ 350,000; August, $ 290,000; September, $ 320,000; October, $ 275,000; and November, $ 265,000.


Compute the following. (Hint: For part a, you can use Exhibits 7.7 and 7.8 in our textbook for guidance, but note that budgeted sales are in dollars for this assignment.)

a Budgeted merchandise purchases for July, August, September, and October;

b  Budgeted payments on accounts payable for September and October; and


  1. Budgeted ending balances of accounts payable for September and October

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