Question

Jorgansen Lighting, Inc., manufactures heavy-duty street lighting systems for municipalities. The company uses variable costing for internal management reports and absorption costing for external reports to shareholders, creditors, and the government. The company has provided the following data: 

The company's fixed manufacturing overhead per unit was constant at $560 for all three years.

 Required:

 1. Calculate each year's absorption costing net operating income. (Enter any losses or deductions as a negative value.)

 2. Assume in Year 4 that the company's variable costing net operating income was $260,000 and its absorption costing net operating income was $280,000.

 a. Did inventories increase or decrease during Year 4? 

 Increase

 Decrease

 b. How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4? 

 Fixed manufacturing overhead cost = _______ 

 inventory during Year 4 = _______ 

Answer 1

Ans:

	Year 1	Year 2	Year 3
Variable costing net income	300000	279000	250000
Add(deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing	-28000	16800	33600
Absorption costing net operating income	272000	295800	283600
Workings:
Add(deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing	(150-200)*560	(180-150)*560	(240-180)*560

2a)Increase
We see that absorption costing income is greater than variable costing income
so inventories must have increased
b)Amount of deferral = net income under absorption costing - net income under
variable costing
=280,000-260,000 =				20,000
fixed manufacturing overhead cost deferred inventory during year 4 $20,000

Hope this helped ! Let me know in case of any queries.