Jorgansen Lighting, Inc., manufactures heavy-duty street lighting systems for mu
ID: 2538228 • Letter: J
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 3 Inventories Beginning (units) Ending (units) 200 160 $290,000 160 180 $269,000 180 230 $260,000 Variable costing net operating income The company's fixed manufacturing overhead per unit was constant at $550 for all three years Required: 1. Calculate each year's absorption costing net operating income. (Enter any losses or deductions as a negative value.) Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Year 2 Year 3 Variable costing net operating income Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing Absorption costing net operating incomeExplanation / Answer
Jorgansen Lighting Inc
Reconciliation of varaible costing and absorpiton costing net operating incomes
Year 1
Year 2
Year 3
Variable costing net opreating income
$290,000
$269,000
$260,000
Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing
($22,000)
$11,000
$27,500
Absorption costing net operating income
$268,000
$258,000
$232,500
Deferred (released) fixed manufacturing overhead cost:
Year 1
Year 2
Year 3
beginning inventories (units)
200
160
180
ending inventories (units)
160
180
230
Change in inventories (units)
-40
20
50
2a. Assuming Year 4’s variable costing net operating income $260,000 and absorption costing net operating income $280,000 determination of increase or decrease of inventories during Year 4:
Increase
Explanation:
On comparison, the absorption costing net operating income is higher than variable costing net operating income in year 4, which indicates an increase in inventories in the Year 4 and the consequent deferral of fixed manufacturing overhead in inventories. The deference between the net operating incomes under the two methods $20,000 (280,000 – 260,000) represents the amount of deferral.
2b. determination of the amount of fixed manufacturing overhead cost deferred or released from inventory during Year 4:
Fixed manufacturing overhead cost deferred in inventory during Year 4 is $20,000
Reconciliation of varaible costing and absorpiton costing net operating incomes
Year 1
Year 2
Year 3
Variable costing net opreating income
$290,000
$269,000
$260,000
Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing
($22,000)
$11,000
$27,500
Absorption costing net operating income
$268,000
$258,000
$232,500
Deferred (released) fixed manufacturing overhead cost:
Year 1
Year 2
Year 3
beginning inventories (units)
200
160
180
ending inventories (units)
160
180
230
Change in inventories (units)
-40
20
50
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