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)	211	152	184
Ending (units)	152	184	221
Variable costing net operating income	$291,800	$274,000	$251,400

  

The company’s fixed manufacturing overhead per unit was constant at $552 for all three years.

3.

value:
1.25 points

Required information

Required:

1.	Determine each year’s absorption costing net operating income.

     

In Year 4, the company’s variable costing net operating income was $251,700 and its absorption costing net operating income was $270,400.

  

a.

Did inventories increase or decrease during Year 4?

	Decrease
	Increase

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

Answer 1

Fixed manufacturing cost becomes a part of inventory under absorption costing but charged as a period cost under variable costing
	Year 1	Year 2	Year 3
Variable costing net operating income	291,800	274,000	251,400
Fixed Manufacturing Overhead	-59*552 = -$32,568	17,664	20,424
Absorption Costing Net Operating Income	259,232	291,664	271,824
Note:	Year 1	Year 2	Year 3
Beginning Inventory	211	152	184
Ending Inventory	152	184	221
Change in Inventory	-59	32	37
2.Increase, since a part of fixed manufacturing cost was deferred and hence, absorption costing income is higher
b.
Deferred by 270,400-251,700 = $18,700