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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 1	Year 2	Year 3
Inventories
Beginning (units)	220	160	190
Ending (units)	160	190	220
Variable costing net operating income	$300,000	$279,000	$260,000

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

rev: 03_09_2019_QC_CS-162392

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 $290,000.

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?

Answer 1

1) Calculate absorption Costing net income

	Year 1	Year 2	Year 3
Variable costing net operating income	300000	279000	260000
Add (less) Fixed manufacturing overhead deferred and released in ending inventory	60*560 = -33600	30*560 = 16800	30*560 = 16800
Absorption Costing net operating income	266400	295800	276800

2) Inventory Increase during year 4

Fixed manufacturing overhead cost deferred or released from inventory during year 4 = (290000-250000) = 40000