Whitman Company has just completed its first year of operations. The company\'s

Question

Whitman Company has just completed its first year of operations. The company's absorption costing income statement for the years below:

Sales (35,000 units X $25 per unit)................................$875,000
Cost of Goods Sold (35,000 units x $16 per unit)................$560,000
Gross margin.........................................................$315,000
Selling and administrative expenses..............................$280,000
Net Operating Income................................................$35,000

The company's selling and administrative expenses consist of $210,000 per year in fixed expenses and $2 per unit sold in variable expenses. The $16 per unit product cost given above is computed as follows:

Direct Materials......................................................$5
Direct Labor...........................................................6
Variable manufacturing overhead..................................1
Fixed manufacturing overhead ($160,000 / 40,000 units).......4
Absorption costing unit product cost.............................$16

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.

Explanation / Answer

Contibution Format :- Total units Sold = 35000 Sale price pu = $25 Less Var Costs : Dir Mat $5 Dir Lab $6 Var Mfg OH $1 Var S&A exp $2 -------------------------------- Total Var cost = $14 Contibuton pu = Sales - Var cost = 25-14 = 11 Total Cont = No of units sold * Cont pu = 35000*11 = 385,000 Less Fixed costs : Mfg OH $160,000 S&A OH $210,000 ---------------------------- Total Fixed OHs $370,000 Gross Profit = Total Cont - Total Fixed OHs = 385,000-370,000 = $15,000....Ans (A) Absorption costing profit = $35,000 Less Marginal costing profit = $15000 -------------------------------------------- $20,000 This is due to over absorption of Fixed OH in bsorption costing wherein OHs are charged to 40,000 units in place of 35,000 in marginal costing. Thus 5000 units @$4 = $20,000 were over absorbed.

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