Question

Sunrise Pools and Spas manufactures fibreglass forms for in-ground pools and swim spas for all-season use. 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 data for their swim spa business in years 1, 2, and 3 shown below.

The company’s fixed manufacturing overhead per unit was constant at $2,500 for all three years:

	Year 1			Year 2			Year 3
Inventories:
Beginning (units)		150			160			150
Ending (units)		160			150			200
Variable costing operating income	$	292,400		$	269,200		$	251,800

Required:

1. Determine each year’s absorption costing operating income. Present your answer in the form of a reconciliation report.

2-a. In year 4, the company’s variable costing operating income was $240,200 and its absorption costing operating income was $205,200. Did inventories increase or decrease during year 4?

• Increase

• Decrease

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

Answer 1

1. Reconcile the variable costing and absorption costing Net income Year 1 Variable Costing Net Operating Income Add (Deduct) Fixed Manufacturing Overheads cost Deferred in (released From) inventory Absorption Costing Net Operating Income Year-2 Year-3 292400 269200251800 25000 25000 125000 317400 244200 376800 Working Note - 1 Year 1 Beginning Inventory Ending Inventory Difference in units =( Ending - Beginning) Difference in manufacturing overheads = ( Difference in units * fixed manufacturing overheads per unit) @2500 Year-2 Year-3 150 160 150 150 200 -10 50 25,000 -25,000 1,25,000 160 10/ 2. Assume in yar 4 Variable costing netoperating income was $240,200and Absorption Costing Net income $ 205,200 Did the inventory Increase ar Decreased Decreased Fixed Manufacturing Overheads : Released From Inventory 35000 during year 4