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 (39,000 units × $41.10 per unit)	$	1,602,900
Cost of goods sold (39,000 units × $24 per unit)		936,000
Gross margin		666,900
Selling and administrative expenses		487,500
Net operating income	$	179,400

The company’s selling and administrative expenses consist of $292,500 per year in fixed expenses and $5 per unit sold in variable expenses. The $24 unit product cost given above is computed as follows:

Direct materials	$	10
Direct labor		5
Variable manufacturing overhead		4
Fixed manufacturing overhead ($275,000 ÷ 55,000 units)		5
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

Answer-1)-

Whitman Company
Contribution Margin statement (Using variable costing approach)
Particulars			Amount
			$
Sales (a)	39000 units*$41.10 per unit		1602900
Less:- Variable cost of goods sold (b)
Opening inventory
Add:- Variable cost of goods manufactured		1045000
Direct materials	55000 units*$10 per unit	550000
Direct labor	55000 units*$5 per unit	275000
Variable factory overhead	55000 units*$4 per unit	220000
Variable cost of goods available for sale		1045000
Less:- Closing inventory	16000 units*$19 per unit	304000	741000
Gross contribution margin C= a-b			861900
Less:-Variable selling & administrative exp.	39000 units*$5 per unit		195000
Contribution margin			666900
Less:- Fixed costs
Manufacturing overhead			275000
Selling & administrative exp.			292500
Net Income			99400

Explanation-Unit product cost under Variable costing:-Direct materials + Direct Labor+ Variable manufacturing overhead

=$10+$5+$4 = $19 per unit

2)-

Reconciliation between net operating income under variable & absorption costing method
Particulars		Amount
		$
Net income under variable costing method		99400
Less:-Fixed manufacturing overheads brought in (opening inventories)	Nil
Add:-Fixed manufacturing overheads carried forward in(closing inventories)	16000 units*$5 per unit	80000
Net income under absorption costing method		179400