Question

4. 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:

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 (uni Variable costg net operating income 210 160 $290,000 160 200 $ 279,000 200 230 $250,000 The company's fixed manufacturing overhead per unit was constant at $560 for all three years. 2. Assume in Year 4 that the company's variable costing net operating income was $260,000 and its absorption costing net operating ncome was $300,000. a. Did inventories increase or decrease during Year 4? Increase Decrease b. How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4? Fixed manufacturing overhead cost inventory during Year 4

Answer 1

2.

a.

The net operating income under variable costing is less than the net operating income under absorption costing is because of the fixed manufacturing overheads that is allocated to inventory under absorption costing and charge it to contribution margin under variable cost.

The increase in the net operating income of absorption costing also indicates that there is an increase in inventory.

Increase

b.

Fixed manufacturing overhead deferred is the difference between the net operating income is of absorption costing and variable costing. $300,000 - $260,000 = $40,000

Deferred $40,000