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

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 (38,000 units × $43.10 per unit)	$	1,637,800
Cost of goods sold (38,000 units × $24 per unit)		912,000
Gross margin		725,800
Selling and administrative expenses		475,000
Net operating income	$	250,800

The company’s selling and administrative expenses consist of $285,000 per year in fixed expenses and $5 per unit sold in variable expenses. The $24 unit product cost given above is computed as follows:

Direct materials	$	11
Direct labor		5
Variable manufacturing overhead		4
Fixed manufacturing overhead ($200,000 ÷ 50,000 units)		4
Absorption costing unit product cost	$	24

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.

Explanation

1.

Sales (38,000 units × $43.10 per unit) = $1,637,800

Variable expenses:

Variable cost of goods sold = 38,000 units × $20 per unit* = $760,000

Variable selling and administrative expenses = 38,000 units × $5 per unit = $190,000

*	Direct materials	$	11
	Direct labor		5
	Variable manufacturing overhead		4
	Total variable manufacturing cost	$	20

2.

The difference in net operating income can be explained by the $48,000 in fixed manufacturing overhead deferred in inventory under the absorption costing method:

Units in ending inventory = Units in beginning inventory + Units produced − Units sold = 0 units + 50,000 units − 38,000 units = 12,000 units

Manufacturing overhead deferred in (released from) inventory = Fixed manufacturing overhead in ending inventory − Fixed manufacturing overhead in beginning inventory = (12,000 units × $4 per unit) − $0 = $48,000

Thanks