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 (40,000 units × $44.10 per unit)	$	1,764,000
Cost of goods sold (40,000 units × $24 per unit)		960,000
Gross margin		804,000
Selling and administrative expenses		420,000
Net operating income	$	384,000

The company’s selling and administrative expenses consist of $300,000 per year in fixed expenses and $3 per unit sold in variable expenses. The $24 unit product cost given above is computed as follows:

Direct materials	$	12
Direct labor		5
Variable manufacturing overhead		2
Fixed manufacturing overhead ($255,000 ÷ 51,000 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.

Unit Product Cost = Direct Materials + Direct Labor + Variable Manufacturing Overhead
Unit Product Cost = $12 + $5 + $2
Unit Product Cost = $19

Variable Cost of Goods Sold = Unit Product Cost * Units Sold
Variable Cost of Goods Sold = $19 * 40,000
Variable Cost of Goods Sold = $760,000

Variable Selling and Administrative Expenses = Variable Selling and Administrative Expenses per unit * Units Sold
Variable Selling and Administrative Expenses = $3 * 40,000
Variable Selling and Administrative Expenses = $120,000

Answer 2.

Fixed Manufacturing Overhead deferred in ending inventory = Fixed Manufacturing Overhead per unit * Units in ending inventory
Fixed Manufacturing Overhead deferred in ending inventory = $5 * 11,000
Fixed Manufacturing Overhead deferred in ending inventory = $55,000