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 × $44.60 per unit)	$	1,828,600
Cost of goods sold (41,000 units × $20 per unit)		820,000
Gross margin		1,008,600
Selling and administrative expenses		471,500
Net operating income	$	537,100

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 $20 unit product cost given above is computed as follows:

Direct materials	$	9
Direct labor		3
Variable manufacturing overhead		3
Fixed manufacturing overhead ($250,000 ÷ 50,000 units)		5
Absorption costing unit product cost	$	20

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.

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

	Whitman Company Variable Costing Income Statement    0 0 0 $0

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. (Enter any losses or deductions as a negative value.)

	Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Variable costing net operating income Absorption costing net operating income

Answer 1

1	Under Variable Costing
	Unit product cost:
	Direct Material	$                  9
	Direct Labor	$                  3
	Variable Manufacturing overhead	$                  3
	Unit product cost	$               15
	Whitman Company
	Variable Costing Income Statement
	Sales	$ 18,28,600
	Variable expenses:
Less:	Variable Cost of goods sold:	$   6,15,000
	Variable selling expenses	$   1,64,000
	Contribution margin	$ 10,49,600
	Fixed Expenses:
Less:	Fixed Manufacturing overhead	$   2,50,000
	Fixed Selling and Administrative expenses	$   3,07,500
	Net operating Income	$   4,92,100
2	Variable costing net operating income (loss)	$   4,92,100
Add:	Fixed Manufacturing overhead cost deferred in (released from) inventory under absorption costing [9000 X $5]	$       45,000
	Absorption costing net operating income (loss)	$   5,37,100