Question

Whitman Company has just completed its first year of operations. The company's absorption costing income statement for the year appears below: Whitman Company Income Statement Sales (38,000 units × $44.10 per unit) Cost of goods sold (38,000 units × $25 per unit) $1,675,800 950,000 Gross margin Selling and administrative expenses 725,800 437,000 Net operating income $ 288,800 The company's selling and administrative expenses consist of $285,000 per year in fixed expenses and $4 per unit sold in variable expenses. The $25 per unit product cost given above is computed as follows: $12 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($255,000 + 51,000 units) 3 Absorption costing unit product cost $ 25

Answer 1

1. Whitman Company

Variable Costing Income Statement

	$	$
Sales		1,675,800
Variable Expenses
Cost of Goods Sold ( 38,000 x $ 20*)	760,000
Selling and Administrative Expenses ( 38,000 x $ 4)	152,000	912,000
Contribution Margin		763,800
Fixed Costs
Manufacturing	255,000
Selling and Administrative	285,000	540,000
Net Operating Income		223,800

* Variable cost of goods sold per unit = Direct Materials + Direct Labor + Variable Manufacturing Overhead = $ 12 + $ 5 + $ 3 = $ 20. ( Please note that fixed costs do not form part of product costs unde the variable costing system).

2. Reconciliation of Variable Costing and Aborption Costing Net Operating Incomes :

	$
Variable costing net operating income	223,800
Add : Fixed manufacturing overhead deferred in ending inventory ( 13,000** x $ 5)	65,000
Absorption costing net operating income	288,800

** Number of units manufactured = 51,000.

Number of units sold = 38,000.

Therefore, number of units in ending inventory = 51,000 - 38,000 = 13,000.