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 × $41.10 per unit) $ 1,602,900 Cost of goods sold (39,000 units × $22 per unit) 858,000 Gross margin 744,900 Selling and administrative expenses 409,500 Net operating income $ 335,400 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: Direct materials $ 10 Direct labor 5 Variable manufacturing overhead 2 Fixed manufacturing overhead ($265,000 ÷ 53,000 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
Whitman Company
Variable Costing Income Statement
Sales		1602900
Variable expenses:
Variable cost of goods sold	663000		=39000*17
Variable selling and administrative expenses	117000		=39000*3
		780000
Contribution margin		822900
Fixed expenses:
Fixed manufacturing overhead	265000
Fixed selling and administrative expenses	292500
		557500
Net operating income(loss)		265400
2
Variable costing net operating income	265400
Add: Fixed manufacturing overhead deferred in inventory	70000		=(53000-39000)*5
Absorption costing net operating income	335400