Question

Whitman Company has just completed its first year of operations. The company’s absorption costing income statement for the year appears below:

  

Whitman Company Income Statement
Sales (35,000 units × $25 per unit)	$	875,000
Cost of goods sold (35,000 units × $16 per unit)		560,000
Gross margin		315,000
Selling and administrative expenses		280,000
Net operating income	$	35,000

  

The company’s selling and administrative expenses consist of $210,000 per year in fixed expenses and $2 per unit sold in variable expenses. The $16 per unit product cost given above is computed as follows:

  

Direct materials	$	5
Direct labor		6
Variable manufacturing overhead		1
Fixed manufacturing overhead ($160,000 ÷ 40,000 units)		4
Absorption costing unit product cost	$	16

  

Required:

1.	Prepare 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.

     

Answer 1

1
Sales		875000
Variable expenses:
Variable cost of goods sold	420000		=35000*(5+6+1)
Variable selling and administrative expenses	70000		=35000*2
		490000
Contribution margin		385000
Fixed expenses:
Fixed manufacturing overhead	160000
Fixed selling and administrative	210000
		370000
Net operating income		15000
2
Variable costing net operating income	15000
Add: Fixed manufacturing overhead deferred in inventory	20000		=(40000-35000)*4
Absorption costing net operating income	35000