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 (42,000 units × $43.60 per unit) $ 1,831,200 Cost of goods sold (42,000 units × $20 per unit) 840,000 Gross margin 991,200 Selling and administrative expenses 441,000 Net operating income $ 550,200 The company’s selling and administrative expenses consist of $315,000 per year in fixed expenses and $3 per unit sold in variable expenses. The $20 unit product cost given above is computed as follows: Direct materials $ 10 Direct labor 3 Variable manufacturing overhead 2 Fixed manufacturing overhead ($250,000 ÷ 50,000 units) 5 Absorption costing unit product cost $ 20 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 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 (42,000 units × $43.60 per unit) $ 1,831,200 Cost of goods sold (42,000 units × $20 per unit) 840,000 Gross margin 991,200 Selling and administrative expenses 441,000 Net operating income $ 550,200 The company’s selling and administrative expenses consist of $315,000 per year in fixed expenses and $3 per unit sold in variable expenses. The $20 unit product cost given above is computed as follows: Direct materials $ 10 Direct labor 3 Variable manufacturing overhead 2 Fixed manufacturing overhead ($250,000 ÷ 50,000 units) 5 Absorption costing unit product cost $ 20 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 (42,000 units × $43.60 per unit) | $ 1,831,200 |
|---|---|
| Cost of goods sold (42,000 units × $20 per unit) | 840,000 |
| Gross margin | 991,200 |
| Selling and administrative expenses | 441,000 |
| Net operating income | $ 550,200 |
The company’s selling and administrative expenses consist of $315,000 per year in fixed expenses and $3 per unit sold in variable expenses. The $20 unit product cost given above is computed as follows:
| Direct materials | $ 10 |
|---|---|
| Direct labor | 3 |
| Variable manufacturing |
2 |
| Fixed manufacturing overhead ($250,000 ÷ 50,000 units) | 5 |
| Absorption costing unit product cost | $ 20 |
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.
Expert Solution
Step 1: Introduction:
Variable costing is that costing system under which all variable manufacturing costs will be part of product costs. Under absorption costing, all manufacturing costs will be part of product costs, either fixed or variable.
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