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	170	190
Ending (units)	170	190	230
Variable costing net operating income	$300,000	$269,000	$260,000

The company’s fixed manufacturing overhead per unit was constant at $400 for all three years.

Required:

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

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
	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

Answer 1

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

	Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Year 2 Year 3 Variable costing net operating income 300000 269000 260000 Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing 40*400 = -16000 20*400 = 8000 40*400 = 16000 Absorption costing net operating income 284000 277000 276000