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 210 160 $300,eee 160 190 $269,000 190 220 $260,000 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.) 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

	year 1	year 2	year 3
variable costing net operating income	300,000	269,000	260,000
add: (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing	(28,000)	16,800	16,800
absorption costing net operating income	272,000	285,800	276,800

working:

in the years where the beginning inventory is greater than ending inventory, the overhead of the previous years will be absorbed in the current year and the amount will be deducted from variable costing net operating income.(this is because absorption is released in this case).

In the years where the beginning inventory is less than ending inventory, the overhead of the current year will be absorbed in the next year and the amount will be added to variable costing net operating income.(this is because absorption is deferred in this case)

so in the year 1 we will deduct ($560*(210-160))units =>$560*50 =>$28,000 from variable costing net operating income.

in the year 2 we will add ($560*(190-160)) units =>$560*30 units =>$16,800 to variable costing net operating income.

in the year 3 we will add ($560*(220-190))units =>$560*30 units =>$16,800 to variable costing net operating income.