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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)	220	160	190
Ending (units)	160	190	220
Variable costing net operating income	$300,000	$279,000	$260,000

The company’s fixed manufacturing overhead per unit was constant at $560 for all three years.

rev: 03_09_2019_QC_CS-162392

Required:

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

Answer 1

WORKING NOTES : 1
	Difference in variable costing and absorption costing is due to fixed overhead .
	Fixed Overhead is charges as product cost in absorption costing and in variable
	costing it is taken as period cost.
	So difference in variable and absorption is due to beginning and ending inventory
	and fixed overhead included in absorption costing
Solution:
		Year 1	Year 2	Year 3
	Variable Costing net operating income	$                    300,000	$                      279,000	$                  260,000
	Less: Fixed cost involved in Beginning inventory	$                  (123,200)	$                      (89,600)	$               (106,400)
		(220 Units X $ 560)
	Add: Fixed Cost involved in Ending invntory	$                      89,600	$                      106,400	$                  123,200
		(160 Units X $ 560)	(190 Units X $ 560)	(220 Units X $ 560)
	Income as per absorption Costing	$                    266,400	$                      295,800	$                  276,800