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.

Requried:
Determine each yearâs absorption costing net operating income.

Answer 1

Answer:

The absorption costing NOI (net operating income) of Year 1

Change in inventory = Beginning Inventory - Ending Inventory

= 200 units - 170 units

= 30 units

Fixed Manufacturing Overhead Beginning  = Beginning Inventory units *  Fixed manufacturing overhead per unit

= 200 units * $560

= $112,000

Fixed Manufacturing Overhead Ending = Ending Inventory units * Fixed manufacturing overhead per unit

= 170 units * $560

= $95,200

Deferred in/(release)  =Fixed Manufacturing Overhead Ending - Fixed Manufacturing overhead Beginning

= $95,200 - $112,00

= -$16,800

Absorption Costing NOI = Variable Costing NOI + Fixed manufacturing overhead from inventory deferred during the period

= $1,012,400 + -$16,800

= $1,063,000

The absorption costing NOI (net operating income) of Year 2

Change in inventory = Beginning Inventory - Ending Inventory

= 170 units - 180 units

= -10 units

Fixed Manufacturing Overhead Beginning  = Beginning Inventory units *  Fixed manufacturing overhead per unit

= 170 units * $560

= $95,200

Fixed Manufacturing Overhead Ending = Ending Inventory units * Fixed manufacturing overhead per unit

= 180 units * $560

= $100,800

Deferred in/(release)  =Fixed Manufacturing Overhead Ending - Fixed Manufacturing overhead Beginning

= $100,800 - $95,200

= $5,600

Absorption Costing NOI = Variable Costing NOI + Fixed manufacturing overhead from inventory deferred during the period

= $1,032,400 + $5,600

= $1,038,000

The absorption costing NOI (net operating income) of Year 3

Change in inventory = Beginning Inventory - Ending Inventory

= 180 units - 220 units

= -40 units

Fixed Manufacturing Overhead Beginning  = Beginning Inventory units *  Fixed manufacturing overhead per unit

= 180 units * $560

= $100,800

Fixed Manufacturing Overhead Ending = Ending Inventory units * Fixed manufacturing overhead per unit

= 220 units * $560

= $123,200

Deferred in/(release)  =Fixed Manufacturing Overhead Ending - Fixed Manufacturing overhead Beginning

= $123,200 - $100,800

= $22,400

Absorption Costing NOI = Variable Costing NOI + Fixed manufacturing overhead from inventory deferred during the period

= $996,400 + $22,400

= $1,018,800