Question

Required information (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 Inventories Beginning (units) Ending (units) Variable costing net operating income 220 170 200 170 200 230 $ 290,000 $269,000 $260,000 The company's fixed manufacturing overhead per unit was constant at $570 for all three years. Required: 1. Calculate each year's absorption costing net operating income. (Enter any losses or deductions as a negative value.) 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

Answer 1

1 Reconciliation of variable & absorption costing operating Income Year 1 Year 3 $ Net Operating income under variable costing Add(Deduct) Fixed Manufacturing OH cost deffered in inventory Net Operating income under absorption costing 290,000 $ (28,500) $ 261,500 $ Year 2 269,000 $ 17,100 $ 286,100 $ 260,000 17,100 277,100 Working Year 1 Year 2 Year 3 230 Ending Inventory Less Beginning Inventory Change in Inventory Multiply Fixed Mfg overhead per unit Fixed Mfg overhead defferred/realesed in inventory 170 220 -50 200 170 30 570 17,100 200 30 570 17,100 570 (28,500) $ $ In absorption costing Fixed overhead per unit is taken into consideration and in variable costing total fixed overhead is considered. So there is difference in income of both the methods. In varaible costing Fixed mfg oh of all units produced is deducted while in absorption costing only Fixed mfg cost of units sold is deducted, so take difference in inventory and multiply with fixed mfg cost per unit, add or deduct this from variable costing to get absorption costing operating income. Year 4 Less Net Operating income under absorption costing Net Operating income under variable costing Fixed Manufacturing OH cost deffered in inventory 280,000 250,000 30,000 Inventories increase during the year The difference in absorption and variable income is due to fixed manufacturing OH, Variable Operating income takes total fixed Mfg OH into consideration, if Variable income is less than absorption costing income that means fixed mfg cost in absorption costing was less than same in variable costing, that means units produced are more than units sold which will result into increased inventory in year 4. нь Fixed manufacturing Overhead cost deffered in inventory during year 4 by $30000 Deffered because production is more than sales.