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 (40,000 units × $43.60 per unit)	$	1,744,000
Cost of goods sold (40,000 units × $22 per unit)		880,000
Gross margin		864,000
Selling and administrative expenses		460,000
Net operating income	$	404,000

The company’s selling and administrative expenses consist of $300,000 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	$	11
Direct labor		4
Variable manufacturing overhead		3
Fixed manufacturing overhead ($180,000 ÷ 45,000 units)		4
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

Whitman Company
Variable-Costing Income Statement
Sales		$1,744,000.00
Variable cost of goods sold (11+4+3)X 40000	$720,000.00
Variable selling expense ($4*40000)	$160,000.00	$880,000.00
Contribution margin		$864,000.00
Less:
Fixed Manufacturign Overhead		$180,000.00
Fixed Selling and administrative expenses		$300,000.00
Operating income		$384,000.00

Reconciliation
Operating Income as per absorption costing	$404,000.00
Less: Deferred in ending Inventory (45000 Unit - 40000 Unit )X 4	$20,000.00
Operating Income as per Variable costing	$384,000.00