Question

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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 2 Year 1 Year 3 Inventories Beginning (units) Ending (units) Variable costing net operating income 200 150 190 150 190 230 $290,000 $269,000 $250,000 The company's fixed manufacturing overhead per unit was constant at $570 for all three years. Exercise 6-3 Part 2 2. Assume in Year 4 that the company's variable costing net operating income was $250,000 and its absorption costing net operating income was $260,000. a. Did inventories increase or decrease during Year 4? O 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

1. Reconcile the variable costing and absorption costing Net income Year 1 Year-2 Year-3 290000 269000 250000 -28500 22800 22800 Variable Costing Net Operating Income Add (Deduct) Fixed Manufacturing Overheads cost Deferred in releasedFrom) inventory Absorption Costing Net Operating Income 261500 2918001 272800 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) Year-2 Year-3 200 150 190 150 190 230 -50 40 -28,500 22,800 22,800 2. Assume in yar 4 Variable costing netoperating income was $250,000 and Absorption Costing Net income $ 260,000 Did the inventory Increase ar Decreased Increased Fixed Manufacturing Overheads: Deferred in Inventory during year 4 10000 = 260000-250000