Question

8

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 (41,000 units X $40.60 per unit) Cost of goods sold (41,000 units * $21 per unit) Gross margin Selling and administrative expenses Net operating income $1,664,689 861,080 803,680 430,500 373,100 s The company's selling and administrative expenses consist of $307,500 per year in fixed expenses and $3 per unit sold in variable expenses. The $21 unit product cost given above is computed as follows: 12 E36 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($196,890 + 49,000 units) Absorption costing unit product cost s 4 21 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

Assuming the Firm Using the Variable Cositng Variable Costing Calculation of Unit cost Under Variable Costing Direct Material Direct Labour Variable Manufacturing Overhead Unit Product Cost Variable Costing Unit Product Cost Variable Costing income Statement 1664600 697000 123000 Sales (41000*40.60) LESS: Variable Expense Variable Cost of Goods Sold (41000*17) Variable Selling and Administrative Expense(41000*3) Total Varible Expenses Total Contribution Margin Less:Fixed Expenses Fixed manufacturing Overheads Fixed Selling and Administrative Expenses Total fixed Expenses Net operating income (loss) 820000 844600 196000 307500 503500 341100

Reconciliation of Varaible costing and Absorption costing net operating income 341100 32000 Variable Costing Net Operating Income ADD: fixed Manufacturing Overheads Deferred in inventory under Absorption Costing Absorption Costing Net Operating Income (loss) 373100 Calcualtion Units Produced Units Sold Difference in units =( Produces -Sold) Difference in manufacturing overheads = Difference in units * fixed manufacturing overheads per unit) = Fixed Manufacturing overheads per unit Fixed Manufacturing Overheads Deferred in inventory under Absorption Costing : 49000 41000 8000 32,000 32,000