Question

Exercise 6-12 (Algo) Variable Costing Income Statement; Reconciliation [LO6-2, LO6-3]

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 (42,000 units × $43.10 per unit)	$	1,810,200
Cost of goods sold (42,000 units × $26 per unit)		1,092,000
Gross margin		718,200
Selling and administrative expenses		483,000
Net operating income	$	235,200

The company’s selling and administrative expenses consist of $315,000 per year in fixed expenses and $4 per unit sold in variable expenses. The $26 unit product cost given above is computed as follows:

Direct materials	$	12
Direct labor		5
Variable manufacturing overhead		3
Fixed manufacturing overhead ($306,000 ÷ 51,000 units)		6
Absorption costing unit product cost	$	26

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

Solution:

Whitman company
Variable costing Income statement
Sales		18,10,200
Variable expenses
Variable cost of goods sold (12 + 5 +3) x 42000	840000
Variable selling and administration expenses(42000 x 4)	168000
		1008000
Contribution margin		8,02,200
Fixed expenses
Fixed manufacturing overhead	3,06,000
Fixed selling and administration expenses	3,15,000
		6,21,000
Net operating Income		1,81,200

Reconcile of variable costing and Absorption costing Net Operating Income
Variable costing net operating Income	1,81,200
Add: Fixed manufacturing overhead cost determined in inventory under absorption costing (1092000 -840000 - 306000)	54,000
Absorption costing net operating Income	2,35,200