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 (38,000 units × $41.10 per unit)	$	1,561,800
Cost of goods sold (38,000 units × $23 per unit)		874,000
Gross margin		687,800
Selling and administrative expenses		437,000
Net operating income	$	250,800

The company’s selling and administrative expenses consist of $285,000 per year in fixed expenses and $4 per unit sold in variable expenses. The $23 per unit product cost given above is computed as follows:

  

Direct materials	$	11
Direct labor		5
Variable manufacturing overhead		3
Fixed manufacturing overhead ($200,000 ÷ 50,000 units)		4
Absorption costing unit product cost	$	23

Required:

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

	Whitman Company Variable Costing Income Statement Variable expenses: Fixed expenses:

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.

	Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes (losses) Variable costing net operating income (loss) Absorption costing net operating income (loss)

Answer 1