Whitman Company has just completed its first year of operations. The company’s absorption costing income statement for the year follows:
|Sales (39,000 units × $44.60 per unit)||$||1,739,400|
|Cost of goods sold (39,000 units × $22 per unit)||858,000|
|Selling and administrative expenses||409,500|
|Net operating income||$||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:
|Variable manufacturing overhead||2|
|Fixed manufacturing overhead ($235,000 ÷ 47,000 units)||5|
|Absorption costing unit product cost||$||22|
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.
|Variable Costing Income Statement|
|Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes|
|Variable costing net operating income|
|Absorption costing net operating income|
Unit product cost under variable costing:-
|Direct manufacturing overhead||2|
|Unit product cost||$17|
Variable Costing Income StatementSales (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
|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|
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