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) 210 160 180
Ending (units) 160 180 230
Variable costing net
operating income $290,000, $279,000 $250,000


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 inventories

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 $260,000 and its absorption costing net operating income was $290,000.

(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

Requirement 1:
calculation of each year’s absorption costing net operating income of year 1, 2 and 3 are:

                                               Year 1      Year 2       Year 3
Beginning inventories                 210 160            180    
Ending inventories                      160            180     230
Change in inventories 50             -20 - 50

Fixed Manufacturing OH in beginning Inventories $117,600      $89,600       $100,800  
Fixed Manufacturing OH in ending inventories   $89,600 $100,800      $128,800
Fixed Manufacturing OH deferred
in (released from) inventories $28,000        $11,200         $28,000

Variable Costing net OI              $290,000 $279,000 $250,000

Add: (deduct) Fixed Manufacturing OH cost
deferred in (released from)
inventory under absorption
costing                                   - $28,000 +  $11,200       + $28,000

Absorption costing net OI     $262,000 $290,200 $278,000


Requirement 2:
In Year 4, the company's variable costing net operating income was $260,000 and its absorption costing net operating income was $290,000

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

Yes,Inventories increased during Year 4.


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

Deferred or released            50 units ($30,000/$560 = 53.57 units)
Fixed Manufacturing OH cost                $30,000
deferred in inventory is 30,000 in year 4