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 (42,000 units × $42.10 per unit)	$	1,768,200
Cost of goods sold (42,000 units × $23 per unit)		966,000
Gross margin		802,200
Selling and administrative expenses		483,000
Net operating income	$	319,200

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 $23 unit product cost given above is computed as follows:

Direct materials	$	12
Direct labor		4
Variable manufacturing overhead		3
Fixed manufacturing overhead ($208,000 ÷ 52,000 units)		4
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.

Answer 1

Solution: 1. Preparation of Income Satatement using Variable Costing: Whitman Company Variable Costing Income Statement Particulars Amount{$} Amount{$} [A] Sales $1,768,200 [B] Variable expenses: Variable cost of goods sold   [42,000 units x $19* per unit] $798,000 Variable selling and administrative expenses [42,000 units x $4 per unit] $168,000 Total Variable expenses [B] $966,000 [D] Contribution Margin [A - B] $802,200 [E] Fixed Expenses: Fixed manufacturing overhead [given] $208,000 Fixed selling and administrative expenses [given] $315,000 Total Fixed Expenses [E] $523,000 [F] Net operating income [D - E] $279,200 * Product Unit cost per unit = Direct Material + Direct Labor + Variable Manufacturing Overhead = $12 + $4 + $3 = $19 per unit 2. Reconciliation Statement Particulars Amount[$] Variable costing net operating income $279,200 Add: Fixed manufacturing overhead deferred in inventory under absorption costing { [52,000units - 42,000 units] x $4 per unit} $40,000 Absorption costing net operating income $319,200