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 × $40.60 per unit)	$	1,583,400
Cost of goods sold (39,000 units × $22 per unit)		858,000
Gross margin		725,400
Selling and administrative expenses		448,500
Net operating income	$	276,900

The company’s selling and administrative expenses consist of $292,500 per year in fixed expenses and $4 per unit sold in variable expenses. The $22 unit product cost given above is computed as follows:

Direct materials	$	10
Direct labor		4
Variable manufacturing overhead		3
Fixed manufacturing overhead ($250,000 ÷ 50,000 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		1583400
Variable cost
Variable cost of goods sold (39000*17)	(663000)
Variable selling and administrative expense (39000*4)	(156000)	(819000)
Contribution margin		764400
Fixed cost
Fixed manufacturing cost	(250000)
Fixed selling and administrative expense	(292500)	(542500)
Net operating income		221900

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	221900
Add: Fixed manufacturing overhead cost deferred in ending inventory (11000*5)	55000
Absorption costing net operating income	276900