Question

Exercise 6-3 Reconciliation of Absorption and Variable Costing Net Operating Incomes

Special instructions: Complete Exercise 6-3 in this document after the requirements list. You can create a table for the reconciliation report. Exhibit 6-4 provides an example that should help you complete the exercise.

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)	200	170	180
Ending (units)	170	180	220
Variable costing net operating income	$1,080,400	$1,032,400	$996,400

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. Present your answer in the form of a reconciliation report.
2. Assume in Year 4 that the company’s variable costing net operating income was $984,400 and its absorption costing net operating income was $1,012,400
   1. Did inventories increase or decrease during Year 4?
   2. How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4?

Exercise 6-5 Companywide and Segment Break-Even Analysis

Special instructions: Answer the questions for Exercise using Microsoft Excel. The equations on page 274 of your textbook will help you complete this exercise.

Piedmont Company segments its business into two regions—North and South. The company prepared the contribution format segmented income statements as shown below:

	Total Company		North		South
Sales	$           600,000		$         400,000		$       200,000
Variable expenses	360,000		280,000		80,000
Contribution margin	240,000		120,000		120,000
Traceable fixed expenses	120,000		60,000		60,000
Segment margin	120,000		$           60,000		$          60,000
Common fixed expenses	50,000
Net operating income	$             70,000

Required:

1. Compute the companywide break-even point in dollar sales.
2. Compute the break-even point in dollar sales for the North region.
3. Compute the break-even point in dollar sales for the South region.

Exercise 7-5 Product and Customer Profitability Analysis

Special instructions: Compute the requirement for Exercise 7-5 on this document.

Thermal Rising, Inc., makes paragliders for sale through specialty sporting goods stores. The company has a standard paraglider model, but also makes custom-designed paragliders. Management has designed an activity-based costing system with the following activity cost pools and activity rates:

Activity Cost Pool		Activity Rate
Supporting direct labor		$26 per direct labor-hour
Order processing		$284 per order
Custom design processing		$186 per custom design
Customer service		$379 per customer

Management would like an analysis of the profitability of a particular customer, Big Sky Outfitters, which has ordered the following products over the last 12 months:

	Standard Model	Custom Design
Number of gliders	20	3
Number of orders	1	3
Number of custom designs	0	3
Direct labor-hours per glider	26.35	28.00
Selling price per glider	$1,850	$2,400
Direct materials cost per glider	$564	$364

The company’s direct labor rate is $19.50 per hour.

Required:

1. Using the company’s activity-based costing system, compute the customer margin of Big Sky Outfitters.

Answer 1

Ex 6-3

Working as follows:

	Year 1	Year 2	Year 3
Beginning inventories (Units) (A)	200	170	180
Ending inventories (Units) (B)	170	180	220
Change in inventories [C= A-B]	30	-10	-40
Fixed manufacturing overhead deferred in (released from) inventory [D = $560 × C]	$16,800	$5,600	$22,400
Variable costing Net operating income	$1,080,400	$1,032,400	$996,400
Add/(Deduct) (D)	($16,800)	$5,600	$22,400
Absorption costong Net operating income	$1,063,600	$1,038,000	$1,018,800

_________________________________________________________________

a)

Inventories increased during year 4

b)

Deferred or released = 50 units ($28,000/$560)

Fixed manufacturing overhead cost = $28,000

Analysis:

Variable costing operating income	$984,400
Add: Ending inventory (270 × $560)	$151,200
Less: Beginning inventory (220 × $560)	$123,200
Absorption costing operating income	$1,012,400