Question

Exercise 6-3 (Algo) Reconciliation of Absorption and Variable Costing Net Operating Incomes [LO6-3]

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	170	200
Ending (units)	170	200	230
Variable costing net operating income	$290,000	$279,000	$260,000

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

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

2. Assume in Year 4 that the company’s variable costing net operating income was $260,000 and its absorption costing net operating income was $290,000.

a. Did inventories increase or decrease during Year 4?

multiple choice

• Increase

• Decrease

b. How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4?

Answer 1

1
Calculate each year's absorption costing net operating income
Year	1	2	3
Beginning inventories	210	170	200
Ending inventories	170	200	230
Change in inventory level	-40	30	30
Fixed manufacturing overhead costs per unit	$560	$560	$560
Value of change in inventory level	-$22,400	$16,800	$16,800
Variable costing net operating income	$2,90,000	$2,79,000	$2,60,000
Absorption costing net operating income	$2,67,600	$2,95,800	$2,76,800
2a
The net operating income under absorption costing is higher than under variable costing which mean fixed costs is deferred in ending inventory
The inventories has therefore increase during year 4
b.
Fixed manufacturing overhead deferred	$30,000	290000-260000