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 200 170 $1,080,400 170 180 $1,032,400 180 220 $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. (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

Solution 1:

Jorgansen Lighting Inc.
Reconciliation of Net Operating income under absorption costing & Variable Costing
Particulars	Year 1	Year 2	Year 3
Variable Costing Net Operating Income	$10,80,400	$10,32,400	$9,96,400
Add (deduct): Fixed manufacturing overhead deferred in (released from) inventory [(Ending units- Beginning units)*$560]	-$16,800	$5,600	$22,400
Net Operating Income - Absorption Costing	$10,63,600	$10,38,000	$10,18,800

Solution 2a:

Since absorption costing net income is higher, that means fixed overhead is deferred in ending inventory,

Therefore, Inventories "Increase" during Year 4.

Solution 2b:

Fixed manufacturing overhead cost "deferred in" inventory during Year 4 = $1012400 - $984400 = $28,000