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 (41,000 units x $45.10 per unit) Cost of goods sold (41,000 units x $21 per unit) Gross margin Selling and administrative expenses Net operating income $1,849,100 861,000 9BB, 100 471,500 $ 516,600 The company's selling and administrative expenses consist of $307,500 per year in fixed expenses and $4 per unit sold in variable expenses. The $21 unit product cost given above is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($230,000 + 46,000 units) Absorption costing unit product coat 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

Ans.1	In variable costing method, the unit product cost is the sum of only variable
	manufacturing costs per unit
	Unit product cost under Variable Costing:
	Direct materials	$9
	Direct labor	$4
	Variable Overhead per unit	$3
	Total production cost per unit	$16
	WHITMAN   COMPANY
	Variable Costing Income Statement
	Particulars		Amount
	Sales		$1,849,100
	Less: Variable cost of goods sold:
	Opening inventory	$0
	Add: Variable cost of goods manufactured (46,000 * $16)	$736,000
	Variable cost of goods available for sale	$736,000
	Less: Ending inventory [(46,000 - 41,000) * $16]	-$80,000
	Variable cost of goods sold		$656,000
	Gross Contribution Margin		$1,193,100
	Less: Variable Selling and Adm. Exp.    ($4 * 41,000)		$164,000
	Contribution Margin		$1,029,100
	Less: Fixed expenses:
	Fixed manufacturing overhead	$230,000
	Fixed selling and administrative expenses	$307,500	$537,500
	Net operating income		$491,600
	*Variable cost of goods manufactured = Units produced * Variable unit product cost
	*Variable selling and administrative expenses = Units sold * Variable selling and administrative expenses per unit sold
Ans. 2	Difference in profit   =   Absorption costing net income - Variable costing net income
	$516,600 - $491,600
	$25,000
	There is difference of $25,000 in Net income between absorption costing and variable costing.
	The underlying reason for the difference between two methods is fixed manufacturing overhead.
	It can be calculated by the following way:
	Difference = Fixed manufacturing overhead per unit * No. of units in ending inventory
	$5 * (46,000 - 41,000)
	$5 * 5,000
	$25,000