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 1	Year 2	Year 3
Inventories
Beginning (units)	200	150	180
Ending (units)	150	180	220
Variable costing net operating income	$290,000	$269,000	$260,000

The company’s fixed manufacturing overhead per unit was constant at $400 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 OR Decrease?

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

Answer 1

Solution :

2.

(a) Did inventories increase or decrease during Year 4?

Increases, Since the Income under Absorption Costing has been increased than Income from Variable Costing. It means that Fixed Manufacturing Overhead has been deferred in Increased level of Inventory.

(b) Fixed Manufacturing OH deferred by the Differene of Income Under Absorption Costing $ 290,000 and Income under Variable Costing $ 250,000.

Fixed Manufacturing OH Deferred by $ 40,000 (i.e. $ 290,000 - $ 250,000).

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