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

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 (39,000 units × $42.10 per unit)	$	1,641,900
Cost of goods sold (39,000 units × $26 per unit)		1,014,000

Gross margin		627,900
Selling and administrative expenses		487,500

Net operating income	$	140,400

The company’s selling and administrative expenses consist of $292,500 per year in fixed expenses and $5 per unit sold in variable expenses. The $26 per unit product cost given above is computed as follows:


Direct materials	$	11
Direct labor		5
Variable manufacturing overhead		4
Fixed manufacturing overhead ($324,000 ÷ 54,000 units)		6

Absorption costing unit product cost	$	26

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.

Solutions

Expert Solution

1) Whitman Company

Contribution Format Income Statement (Amounts in $)

Sales (39,000 units*$42.10 per unit)		1,641,900
Less: Variable costs
Direct materials (39,000 units*$11)	429,000
Direct labor (39,000 units*$5)	195,000
Variable manufacturing overhead (39,000 units*$4)	156,000
Variable selling and administrative exp (39,000*$5)	195,000
Total variable costs		(975,000)
Contribution Margin		666,900
Less: Fixed costs
Fixed manufacturing overhead	324,000
Fixed selling and administrative exp	292,500
Total Fixed costs		(616,500)
Net Operating Income		50,400

2) Units produced = 54,000 units

Units sold = 39,000 units

Ending inventory in units = 54,000 - 39,000 = 15,000 units

Reconciliation Statement (Amounts in $)

Net operating income as per variable costing	50,400
Add: Fixed manufacturing overhead deferred in ending inventory under absorption costing [($324,000/54,000 units)*15,000 units]	90,000
Net operating income as per absorption costing	140,400

ekkarill92 answered 1 year ago

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