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 × $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.

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