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 (38,000 units × $40.10 per unit)	$	1,523,800
Cost of goods sold (38,000 units × $24 per unit)		912,000
Gross margin		611,800
Selling and administrative expenses		437,000
Net operating income	$	174,800

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 $24 unit product cost given above is computed as follows:

Direct materials	$	11
Direct labor		5
Variable manufacturing overhead		3
Fixed manufacturing overhead ($265,000 ÷ 53,000 units)		5
Absorption costing unit product cost	$	24

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

Income statement in contribution format using variable costing
Units   =	38000		Total	Per unit
Sales			1523800	40.1
Variable costs
Direct Materials			418000	11	987000
Direct Labor			190000	5	75000
Variable Manufacturing Overheads			114000	3	912000
Variable selling & admin expenses			152000	4
Total Variable costs			874000	23
Contribution Margin			649800	17.1
Fixed costs
Fixed manufacturing Overheads			265000
Fixed selling & admin expenses			285000		437000
Total Fixed Costs			550000
Operating Income			99800
Reconciliation of Net Operating Income between Variable costing and absorption costing
Operating Income as per variable costing						99800
Add : Underapplied fixed Manufacturing overhead						75000
	=(53000-38000)*5
Operating income as per absorption costing						174800