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	151	197
Ending (units)	151	197	228
Variable costing net operating income	$294,000	$277,400	$256,100

  

The company’s fixed manufacturing overhead per unit was constant at $568 for all three years. Required: 1. Determine each year’s absorption costing net operating income. 2. In Year 4, the company’s variable costing net operating income was $242,900 and its absorption costing net operating income was $262,400.    a. Did inventories increase or decrease during Year 4? Increase Decrease b. How much fixed manufacturing overhead cost was deferred in or released from inventory during Year 4?

Answer 1

Req 1:
					Year1	Year2	Year3
Net Income as per Variable costing					294000	277400	256100
Add: Fixed manufacturing cost deferred						27264	17608
Less: Fixed cost released					-33512
Income as per Absorption costing					260488	304664	273708
Note: When the inventory level increases a the year end, the fixed cost per unit on increassed inventory is deferred, resulting in increase in income under Absorption costin.
Note: when inventory level decrease, the fixed cost for decreased level of inventory released, resulting in decreased income under Absorption costing.
Req 2a:
As the income under Abosption costing is higher than variable costing, this suggests that the fixed cost is defferred which is because of increased inventory level.
INCREASE in inventory level.
Req 2b:
Income under Absorption costing				262400
Less: Income under variable costing				-242900
Fixed overheads defferred				19500