Question

Whitman Company has just completed its first year of operations. The company’s absorption costing income statement for the year follows:

Whitman Company Income Statement
Sales (41,000 units × $43.10 per unit)	$	1,767,100
Cost of goods sold (41,000 units × $23 per unit)		943,000
Gross margin		824,100
Selling and administrative expenses		471,500
Net operating income	$	352,600

The company’s selling and administrative expenses consist of $307,500 per year in fixed expenses and $4 per unit sold in variable expenses. The $23 unit product cost given above is computed as follows:

Direct materials	$	11
Direct labor		4
Variable manufacturing overhead		3
Fixed manufacturing overhead ($250,000 ÷ 50,000 units)		5
Absorption costing unit product cost	$	23

Required:

1. Redo the company’s income statement in the contribution format using variable costing.

2. Reconcile any difference between the net operating income on your variable costing income statement and the net operating income on the absorption costing income statement above.

variable costing net operating income ____

________________ ___________

absorption costing net operating income _____

Answer 1

Answer:-1)-

Whitman Company
Contribution Income statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	41000 units*$43.10 per unit		1767100
Less:- Variable cost of goods sold (b)
Opening inventory		NIL
Add:- Variable cost of goods manufactured		900000
Direct materials	50000 units*$11 per unit	550000
Direct labor	50000 units*$4 per unit	200000
Variable manufacturing overhead	50000 units*$3 per unit	150000
Variable cost of goods available for sale		900000
Less:- Closing inventory	9000 units*$18 per unit	162000	738000
Gross contribution margin C= a-b			1029100
Less:-Variable selling & administrative exp.	41000 units*$4 per unit		164000
Contribution margin			865100
Less:- Fixed costs
Manufacturing overhead			250000
Selling & administrative exp.			307500
Net Income			307600

Explanation;-

Unit product cost (manufacturing cost) under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$11+$4+$3 = $18 per unit

2)-

Reconciliation between net operating income under variable & absorption costing method
Particulars		Amount
		$
Net income under variable costing method		307600
Less:-Fixed manufacturing overheads brought in (opening inventories)	Nil
Add:-Fixed manufacturing overheads carried forward in(closing inventories)	9000 units*$5 per unit	45000
Net income under absorption costing method		352600