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 (39,000 units × $44.60 per unit)	$	1,739,400
Cost of goods sold (39,000 units × $22 per unit)		858,000
Gross margin		881,400
Selling and administrative expenses		409,500
Net operating income	$	471,900

The company’s selling and administrative expenses consist of $292,500 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 ($235,000 ÷ 47,000 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.

Whitman Company
Variable Costing Income Statement
		0
		0
		0
		$0

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Variable costing net operating income
Absorption costing net operating income

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
Variable costing net operating income
Absorption costing net operating income

Answer 1

Unit product cost under variable costing:-

Direct materials	$10
Direct labor	5
Direct manufacturing overhead	2
Unit product cost	$17

1.

Whitman Company

Variable Costing Income Statement

Sales (39,000 units × $44.60 per unit) $1,739,400 Variable expenses (39,000 × $17 per unit) 663,000 Variable selling and administrative expenses (39,000 × $3 per unit) 117,000 Contribution margin 959,400 Fixed manufacturing overhead 235,000 Fixed selling and administrative expenses 292,500 Net operating income $431,900

2.

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes

Variable costing net operating income	$431,900
Add(Less) : Fixed manufacturing overhead deferred in inventory (8,000×5)	40,000
Absorption costing net operating income	$471,900