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 X $43.60 per unit) Cost of goods sold (39,000 units X $21 per unit) Gross margin Selling and administrative expenses Net operating income $1,700,400 819,000 881,400 409,500 $ 471,900 The company's selling and administrative expenses consist of $292,500 per year in fixed expenses and $3 per unit sold in variable expenses. The $21 unit product cost given above is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($318,000 + 53,000 units) Absorption costing unit product cost 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 Income Statement under Variable Costing 1,700,400 less 585,000 117,000 $ Sales Variable Expense: Variable cost of goods sold Variable Selling & adm expense Contribution Margin Fixed Expense: Fixed Manufacturing Overhead Fixed Selling & administrative expense Net Operating Income 702,000 998,400 less 318,000 292,500 $ 610,500 387,900 Variable Costing 9 Unit Product cost Direct Material Direct Labor Variable Manufacturing Overhead Unit Product cost Variable COGS = Units Sold x Unit Product Cost =39000 x 15 = 585000 Variable selling & adm = Units Sold x variable selling cost per unit = 39000 x 3 = 117000 Total fixed mfg cost and Total fixed selling & administrative cost is deducted. In absorption costing Fixed overhead per unit is taken into consideration and in variable costing total fixed overhead is considered. So there is difference in income of both the methods. Reconciliation of variable & absorption costing Net Operating income under variable costing Add Fixed Manufacturing OH cost deffered in inventory Net Operating income under absorption costing 387,900 84,000 (14000 x 6) 471,900