Question

Required information The following information applies to the questions displayed below 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 3 160 Inventories Beginning (units) Ending (units) Variable costing net operating income 210 160 $300,000 190 $269,000 190 220 $260,000 The company's fixed manufacturing overhead per unit was constant at $560 for all three years. 2. Assume in Year 4 that 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? O Increase O Decrease b. How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4? Food manufacturing overhead cost inventory during Year 4

Answer 1

The only difference between absorption costing and variable costing is that the fixed manufacturing overhead becomes a part of product cost under absorption costing while it is charged as a period cost under variable costing

Since absorption costing net income is higher, inventory INCREASED in year 4

Fixed overhead cost deferred = Absorption costing net income- variable costing net income

= 290,000-260,000

=$30,000