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 × $42.10 per unit)	$	1,726,100
Cost of goods sold (41,000 units × $21 per unit)		861,000
Gross margin		865,100
Selling and administrative expenses		512,500
Net operating income	$	352,600

The company’s selling and administrative expenses consist of $307,500 per year in fixed expenses and $5 per unit sold in variable expenses. The $21 unit product cost given above is computed as follows:

Direct materials	$	9
Direct labor		3
Variable manufacturing overhead		4
Fixed manufacturing overhead ($255,000 ÷ 51,000 units)		5
Absorption costing unit product cost	$	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

Variable costing income statement	( in $)
Particulars	Amount
Sales (41,000 units × $42.10 per unit)	1,726,100
Varible Cost ( 41,000 units * Varible Cost per unit)	861,000
Contribution margin	865,100
Less :
Total Fixed Cost (Refer Note 2)	-562,500
Net operating income	302,600
Note 1
Calculation of Variable Cost per unit
Direct Material	9
Direct Labor	3
Variable Manufacturing Overhead	4
Variable Selling & Administration Expenses	5
Variable Cost per unit	21
Note 2
Calculation of Total Fixed Cost
Selling and Administrative Expenses	307,500
Fixed manufacturing overhead	255,000
Total Fixed Cost	562,500
Reconcilation between the net operating income on variable costing income statement and the net operating income on the absorption costing income
Particulars	Amount
Net operating income on variable costing	302,600
Add: Fixed Manufacturing Overhead Cost defferred in Inventory under absorption costing ( 51000 Units - 41000 Units * $ 5)	50,000
Net operating income on absorption costing	352,600