Question

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

  

Whitman Company Income Statement
Sales (42,000 units × $44.60 per unit)	$	1,873,200
Cost of goods sold (42,000 units × $24 per unit)		1,008,000
Gross margin		865,200
Selling and administrative expenses		483,000
Net operating income	$	382,200

The company’s selling and administrative expenses consist of $315,000 per year in fixed expenses and $4 per unit sold in variable expenses. The $24 per unit product cost given above is computed as follows:

  

Direct materials	$	10
Direct labor		5
Variable manufacturing overhead		3
Fixed manufacturing overhead ($288,000 ÷ 48,000 units)		6
Absorption costing unit product cost	$	24

Required:

1. Prepare 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.

Answer 1

1.

Whitman Company
Variable Costing Income Statement
Sales		$1,873,200
Variable expenses:
Variable cost of goods sold  (42,000 units × $18 per unit)	756,000
Variable selling and administrative ($483,000 - $315,000)	168,000
		924,000
Contribution margin		949,200
Fixed expenses:
Fixed manufacturing overhead	288,000
Fixed selling and administrative	315,000
		603,000
Net operating income		$346,200

2.

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Variable costing net operating income (loss)	$346,200
Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing	36,000
Absorption costing net operating income (loss)	$382,200

The difference in net operating income can be explained by the $36,000 in fixed manufacturing overhead deferred in inventory under the absorption costing method.

Units in ending inventory = Units in beginning inventory + Units produced − Units sold
= 0 units + 48,000 units − 42,000 units = 6,000 units

Manufacturing overhead deferred in (released from) inventory = Fixed manufacturing overhead in ending inventory − Fixed manufacturing overhead in beginning inventory = (6,000 units × $6 per unit) − $0 = $36,000