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		430,500
Net operating income	$	434,600

The company’s selling and administrative expenses consist of $307,500 per year in fixed expenses and $3 per unit sold in variable expenses. The $21 unit product cost given above is computed as follows:

Direct materials	$	11
Direct labor		4
Variable manufacturing overhead		2
Fixed manufacturing overhead ($188,000 ÷ 47,000 units)		4
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

	A	Income Statement Under Variable Costing:
		Particulars	Amount		Explanation
		Sales	1,726,100		41000*42.1
		Less: Variable Cost of Goods Sold
		Direct Material	451,000		41000*11
		Direct Labor	164,000		41000*4
		Variable MOH	82,000		41000*2
		Variable S&A	123,000		41000*3
		Gross Contribution	906,100
		Less: Period Costs-Fixed
		Fixed MOH	188,000
		S&A Expenses	307,500
		Net Operating Income	410,600
	B	Income in Variable Costing	410,600
		Add: Additional Fixed MOH charged on Closing Inventory or Unsold Units	24,000
		((47000-41000)*4)
		Income in Absorption Costing	434,600