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 × $42.60 per unit)	$	1,618,800
Cost of goods sold (38,000 units × $23 per unit)		874,000
Gross margin		744,800
Selling and administrative expenses		437,000
Net operating income	$	307,800

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 unit product cost given above is computed as follows:

Direct materials	$	10
Direct labor		4
Variable manufacturing overhead		3
Fixed manufacturing overhead ($312,000 ÷ 52,000 units)		6
Absorption costing unit product cost	$	23

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		1618800
Less: Variable cost of goods sold (17*38000)	(646000)
Less: Variable selling and administrative expense (38000*4)	(152000)	(798000)
Contribution margin		820800
Less: Fixed expense
FIxed manufacturing overhead	(312000)
Fixed selling and administrative expense	(285000)	(597000)
Net operating income		223800

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.

Income from Absorption costing	307800
Less: Fixed manufacturing overhead deferred in ending inventory (6*14000)	(84000)
Income from variable costing	223800