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 $41.60 per unit) Cost of goods sold (41,000 units $23 per unit) Gross margin Selling and administrative expenses Net operating income $1,705,600 943,000 762,600 471,500 $ 291, 100 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 $23 unit product cost given above is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($250,000 = 50,000 units) Absorption costing unit product cost $ 11 4 3 5 $ 23 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2

Answer 1

Answer: Whitman Company Contribution Margin statement (Using variable costing approach) Particulars Amount $ Sales 1705600 Less:- Variable cost of goods sold Variable selling and admin exp. 738000 164000 902000 803600 contribution margin Less:-Fixed cost Fixed Manufacturing overhead Fixed Selling & administrative exp. Net Income 250000 307500 557500 246100 Working notes for the above answer is as under

Calculation of the cost of goods sold Direct materials Direct labor Variable manufacturing overhead Total variable manufacturing cost 11 4 3 18 Variable cost of goods sold = 41,000 units * $18 per unit = $738,000 Calculation of the variable selling and administrative expenses = 41,000 units * $4 per unit = $164,000 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. 246100 Variable costing net operating income Add: Fixed manufacturing overhead cost differed in (released from) inventory ( 5 x 9000) Absorption costing net operating income 45000 291100