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) 200 170 180
Ending (units) 170 180 220
Variable costing net
operating income $1,080,400 $1,032,400 $996,400
The company's fixed manufacturing overhead per unit was constant at $560 for all three years.
Requirement 1:
Determine each year’s absorption costing net operating income. Present your answer in the form of a reconciliation report for year 1, 2 and 3.
Year 1 Year 2 Year 3
Beginning inventories
Ending inventories
Change in inventorie
Fixed manufacturing overhead in beginning inventories
Fixed manufacturing overhead in ending inventories
Fixed manufacturing overhead deferred in (released from) inventorie
Variable costing net operating income
Add (deduct) fixed manufacturing overhead cost deferred in (released from) inventory under absorption costing
Absorption costing net operating income
Requirement 2:
In Year 4, the company's variable costing net operating income was $984,400 and its absorption costing net operating income was $1,012,400.
(a) Did inventories increase or decrease during Year 4?
(b) How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4?
Deferred or released
Ffixed manufacturing overhead cost $

Answer 1

Answer:

Jorgansen Lighting, Inc.

Requirement 1:

                                       Year 1            Year 2          Year 3

Variable costing net

operating income    $1,080,400    $1,032,400      $996,400

Inventory difference      (16,800)           (5,600)        (22,400)

Absorption costing net

operating income  $1,063,600    $1,026,800      $974,000

Requirement 2:

Fixed manufacturing overhead cost deferred = $28,000

Explanation:

a) Data and Calculations:

Fixed manufacturing overhead per unit = $560 for all three years

                                       Year 1            Year 2          Year 3

Inventories:

Beginning (units)              200                 170               180

Ending (units)                    170                 180              220

Difference in inventories  30                  -10               -40

Value of inventory diff   $16,800         ($5,600)      ($22,400)

Variable costing net

operating income    $1,080,400    $1,032,400      $996,400

Inventory difference      (16,800)           (5,600)        (22,400)

Absorption costing net

operating income  $1,063,600    $1,026,800      $974,000

Requirement 2:

                                                                           Year 4

Variable costing net operating income         $984,400

Absorption costing net operating income  $1,012,400

Difference in net operating income               $28,000

Inventory increase by $28,000/$560 = 50 units