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 (38,000 units × $41.60 per unit)	$	1,580,800
Cost of goods sold (38,000 units × $24 per unit)		912,000
Gross margin		668,800
Selling and administrative expenses		475,000
Net operating income	$	193,800

The company’s selling and administrative expenses consist of $285,000 per year in fixed expenses and $5 per unit sold in variable expenses. The $24 unit product cost given above is computed as follows:

Direct materials	$	10
Direct labor		5
Variable manufacturing overhead		4
Fixed manufacturing overhead ($270,000 ÷ 54,000 units)		5
Absorption costing unit product cost	$	24

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.

Answer 1

Whiteman Company
Variable costing income statement
Sales		$ 1,580,800
Less: Variable expenses
Direct material (38,000*$10)	$ 380,000
Direct labor (38,000*$5)	$ 190,000
Variable manufacturing overhead (38,000*$4)	$ 152,000
Variable selling and administrative expenses (38,000*$5)	$ 190,000	$     912,000
Contribution margin		$     668,800
Less: Fixed expenses
Fixed manufacturing overhead	$ 270,000
Fixed selling and administrative expenses	$ 285,000
Total fixed expenses		$     555,000
Net income		$     113,800

2.

Reconciliation
Income computed under variable costing	$                                           113,800
Add: Fixed Manufacturing overhead carried forward (closing inventories)	(54,000-38,000)*$5 = $80,000
Income computed under Full costing costing	$                                           193,800

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