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 follows:

Whitman Company
Income Statement
Sales (40,000 units × $42.60 per unit) $ 1,704,000
Cost of goods sold (40,000 units × $24 per unit) 960,000
Gross margin 744,000
Selling and administrative expenses 460,000
Net operating income $ 284,000

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 $24 unit product cost given above is computed as follows:

Direct materials $ 12
Direct labor 5
Variable manufacturing overhead 3
Fixed manufacturing overhead ($192,000 ÷ 48,000 units) 4
Absorption costing unit product cost $ 24

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.

Homework Answers

Answer #1
1
Sales 1704000
Variable expenses:
Variable cost of goods sold 800000 =40000*20
Variable selling and administrative expenses 160000 =40000*4
Total Variable expenses 960000
Contribution margin 744000
Fixed expenses:
Fixed manufacturing overhead 192000
Fixed selling and administrative expenses 300000
Total Fixed expenses 492000
Net operating income(loss) 252000
2
Variable costing net income 252000
Add: fixed manufacturing overhead deferred in inventory 32000 =8000*4
Absorption costing net operating income 284000
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