Question

Exercise 6-12 Variable Costing Income Statement; Reconciliation [LO6-2, LO6-3]

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 × $40.60 per unit)	$	1,705,200
Cost of goods sold (42,000 units × $22 per unit)		924,000
Gross margin		781,200
Selling and administrative expenses		441,000
Net operating income	$	340,200

The company’s selling and administrative expenses consist of $315,000 per year in fixed expenses and $3 per unit sold in variable expenses. The $22 unit product cost given above is computed as follows:

Direct materials	$	10
Direct labor		5
Variable manufacturing overhead		2
Fixed manufacturing overhead ($245,000 ÷ 49,000 units)		5
Absorption costing unit product cost	$	22

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

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

Sales		1705200
Less; Variable cost of goods sold
Direct material (42000*10)	420000
Direct labour	210000
Variable manufacturing overhead	84000
Total variable cost of goods sold		714000
Manufacturing margin		991200
Variable selling and administrative expense		126000
Contribution margin		865200
Fixed expense
Fixed manufacturing overhead	245000
Fixed selling and administrative expense	315000
Total fixed expense		560000
Net operating income		305200

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.

Variable costing net operating income	305200
Add: Fixed manufacturing overhead cost deferred in ending inventory (7000*5)	35000
Absorption costing net operating income	340200