Question

Whitman Company has just completed its first year of operations. The company’s absorption costing income statement...

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 × $43.10 per unit) $ 1,767,100
Cost of goods sold (41,000 units × $25 per unit) 1,025,000
Gross margin 742,100
Selling and administrative expenses 512,500
Net operating income $ 229,600

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 $25 unit product cost given above is computed as follows:

Direct materials $ 12
Direct labor 3
Variable manufacturing overhead 4
Fixed manufacturing overhead ($288,000 ÷ 48,000 units) 6
Absorption costing unit product cost $ 25

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.

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Answer #1

Solution

Requirement 1

Whitman Corporation
Contribution Format Income Statement
Sales $ 1,767,100
Variable expenses:
Variable Cost of goods sold $ 779,000
Variable Selling and administrative expenses $ 205,000
Total Variable expenses $ 984,000
Contribution margin $ 783,100
Fixed expenses:
Fixed manufacturing expenses 288000
Fixed Selling and administrative expenses $ 307,500
Total Fixed expenses $ 595,500
Net operating income $ 187,600

..

Requirement 2

.

Variable costing net operating income $ 187,600
Fixed manufacturing expense assigned to ending inventory $ 42,000
Absorption costing net operating income $ 229,600

Fixed manufacturing cost in variable costing is considered as a period cost instead of product cost.

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