Whitman Company has just completed its first year of operations. The company’s a
ID: 2557936 • Letter: W
Question
Whitman Company has just completed its first year of operations. The company’s absorption costing income statement for the year follows:
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 $24 unit product cost given above is computed as follows:
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.
Whitman CompanyIncome Statement Sales (38,000 units × $40.10 per unit) $ 1,523,800 Cost of goods sold (38,000 units × $24 per unit) 912,000 Gross margin 611,800 Selling and administrative expenses 437,000 Net operating income $ 174,800
Explanation / Answer
Income statement in contribution format using variable costing Units = 38000 Total Per unit Sales 1523800 40.1 Variable costs Direct Materials 418000 11 987000 Direct Labor 190000 5 75000 Variable Manufacturing Overheads 114000 3 912000 Variable selling & admin expenses 152000 4 Total Variable costs 874000 23 Contribution Margin 649800 17.1 Fixed costs Fixed manufacturing Overheads 265000 Fixed selling & admin expenses 285000 437000 Total Fixed Costs 550000 Operating Income 99800 Reconciliation of Net Operating Income between Variable costing and absorption costing Operating Income as per variable costing 99800 Add : Underapplied fixed Manufacturing overhead 75000 =(53000-38000)*5 Operating income as per absorption costing 174800
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