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 (40,000 units × $41.60 per unit) $ 1,664,000
Cost of goods sold (40,000 units × $21 per unit) 840,000
Gross margin 824,000
Selling and administrative expenses 460,000
Net operating income $ 364,000
The company’s selling and administrative expenses consist of $300,000 per year in fixed expenses and $4 per unit sold in variable expenses. The $21 per unit product cost given above is computed as follows:
Direct materials $ 11
Direct labor 3
Variable manufacturing overhead 3
Fixed manufacturing overhead ($204,000 ÷ 51,000 units) 4
Absorption costing unit product cost $ 21
Prepare the companys income statement in the contribution format using variable costing 1 the he format oosting Whitman Company Variable Costing Income Statement 1,664,000 Sales Variable expenses: Variable selling and administrative S 160,000 680,000 Variable cost of goods sold 840,000 824,000 Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative 824,000 Net operating income 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. Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Variable costing net operating income (loss) Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing Absorption costing net operating income (loss)

1. Variable costing net operating income = $320,000

2. Fixed manufacturing overhead cost deferred in inventory under absorption costing = $44,000

Explanation:

1. Prepare the companys income statement in the contribution format using variable costing.

Before preparing the Variable Costing Income Statement, the following are calculated first:

Total variable manufacturing cost per unit = Direct materials + Direct labor + Variable manufacturing overhead = $11 + $3 + $3 = $17

Total variable manufacturing cost =Total variable manufacturing cost per unit * Number of units sold = $17 * 40,000 = $680,000

Variable selling and admin. expenses = Number of units sold * Variable selling and admin. expenses per unit = 40,000 * $4 = $160,000

The Variable Costing Income Statement can now be prepared as follows:

Whitman Company

Variable Costing Income Statement

For the Year End

Particulars                                                              Amount ($)    

Sales (40,000 units × $41.60 per unit)                  1,664,000

Total variable manufacturing cost                        (680,000)  

Gross contribution margin                                      984,000

Variable selling and admin. expenses                  (160,000)  

Contribution margin                                                824,000

Fixed cost:

Fixed manufacturing overhead                            (204,000)

Fixed selling and administrative expenses         (300,000)  

Net operating income                                           320,000    

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.

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes

Particulars                                                                      Amount ($)                                                                              

Variable costing net operating income (loss)                320,000

Add: Fixed manufacturing overhead cost

deferred in inventory under

absorption costing ($364,000 - $320,00)                       44,000    

Absorption costing net operating income (loss)           364,000  

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