Question

Whitman Company has just completed its first year of operations. The company’s absorption costing income statement...

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.

     

Homework Answers

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
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