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 (42,000 units × $41.10 per unit)	$	1,726,200
Cost of goods sold (42,000 units × $21 per unit)		882,000
Gross margin		844,200
Selling and administrative expenses		525,000
Net operating income	$	319,200

  

The company’s selling and administrative expenses consist of $315,000 per year in fixed expenses and $5 per unit sold in variable expenses. The $21 per unit product cost given above is computed as follows:

  

Direct materials	$	9
Direct labor		3
Variable manufacturing overhead		4
Fixed manufacturing overhead ($250,000 ÷ 50,000 units)		5
Absorption costing unit product cost	$	21

  

Required:

1.	Prepare the company’s income statement in the contribution format using variable costing.
	Whitman Company Variable Costing Income Statement Variable Costing Sales $ 1,726,200 Variable expenses: Variable cost of goods sold Variable selling and administrative 0 1,726,200 Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative 0 Net operating income $ 1,726,200

          

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.

     

Answer 1

1) Prepare the companv's income statement in the contribution format using variable costing as shown below: W Company Variable Costing Income Statement S1,726,200 Sales Less: Variable expenses Varaiable cost of goods sold S672,000 Varaiable selling and administrative (42,000*5 Contribution mar Less: Fixed S210,000$882,000 $844,200 es Fixed manufacturing overhead $250.000 Fixed selling and administrativeS315.000S565.000 Net operating income S279.200 Working note: Particulars Amount (S) Direct material Direct labor Variable manufacturing overhead 4 Total varaiable cost of goods sold per unit Number of units sold Total varaiable cost of goods sold (16*42,000)672000 16 42,000

2) Reconcile the difference between the net operating income as per variable costing and absorption costing as shown below: Under variable costing, fixed cost is treated as period cost and the entire fixed cost is expired in the period in which it is incurred. However, as per the absorption costing fixed cost is treated as product cost and a part of fixed cost is carried forward to next period through ending inventory Reconciliation of Variable Cong and Absorption Costing Net Operating Incomes S279,200 Variable costing net operating income Add: Fixed cost deferred to next period [50,000 units-42,000 units) x S5 per unitS40,0 Absorption costing net operating income $319,200