Question

[The following information applies to the questions displayed below.) 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: Year 1 Year 2 Year 3 217 164 197 Inventories: Beginning (units) Ending (units) Variable costing net operating income 197 225 164 $298.400 $274,200 $250,900 The company's fixed manufacturing overhead per unit was constant at $557 for all three years. 3. value: 2.00 points Required information Required: 1. Determine each year's absorption costing net operating income. Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Year 2 Year 3 Variable costing net operating income Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing Absorption costing net operating income 0S 0S 0 Hints References eBook & Resources Hint #1 Check my work

Answer 1

1) Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year-1 Year-2 Year-3 Variable costing net operating income $298,400 $274,200 $250,900 Add (deduct) fixed mfg. oF deferred or (released from) inventory under abosorp. costing ($29,521) $18,381 $15,596 [Ref: Workings] Absorption costing net operating income $268,879 $292,581 $266,496 Workings: Year-1 Beginning inventory 217 Ending inventory 164 Increase (Decrease) in inventory balance -53 Fixed manufacturing overhead cost per unit $557 Fixed mfg. cost deferred or (released from) inventory under absorption costing ($29,521) Year-2 164 197 33 $557 $18,381 Year-3 197 --> (a) 225 --> (b) 28 --> (c) = (b) - (a) $557 --> (d) $15,596 --> (c) x (d) 2-a) In year-4, when company's variable costing net operating income was $248,900 and its absorption costing net operating income was $279,500, inventories INCREASE.

Reason: In part-1, we observe that absorption costing net operating income is higher than variable costing net operating income when inventory was increased in year-2 & year-3. Therefore, in year-4, when net operating income under absorption costing is higher than net operating income under variable costing, inventory should be increased. 2-b) Fixed manufacturing overhead cost deferred inventory during year-4 $30,600 [$279,500 - $248,900] Reason: In part-1, we observe that fixed mfg. overhead cost is deferred when inventory is increased in year-2 and year-3. Also, when inventory is increased, absorption costing net operating income is higher than variable costing net operating income. Therefore, in year-4 also, when net operating income under absorption costing is higher than net operating income under variable costing, fixed manufacturing overhead cost should be deferred.