Question

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)	210	150	180
Ending (units)	150	180	230
Variable costing net operating income	$300,000	$269,000	$260,000

The company’s fixed manufacturing overhead per unit was constant at $560 for all three years.

Exercise 6-3 Part 1

Required:

1. Calculate each year’s absorption costing net operating income. (Enter any losses or deductions as a negative value.)

	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

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 $270,000.

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