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)	217	158	185
Ending (units)	158	185	227
Variable costing net operating income	$291,500	$278,400	$258,400

  

The company’s fixed manufacturing overhead per unit was constant at $556 for all three years.

3.

value:
0.60 points

Required information

Required:

1.	Determine each year’s absorption costing net operating income.

     

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Hint #1

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4.

value:
0.60 points

Required information

2.	In Year 4, the company’s variable costing net operating income was $248,800 and its absorption costing net operating income was $268,900.

  

a.	Did inventories increase or decrease during Year 4?
	Decrease Increase

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

         

Answer 1

			Year 1	Year 2	Year 3
Beginning inventory			217	158	185
Ending inventory			158	185	227
Increase / (Decrease) in inventory			-59	27	42
Multiply: Fixed Oh cost per unit			556	556	556
Fixed Oh deferred / (Released)			-32804	15012	23352
Net Income as per Variable costing			291500	278400	258400
Net Income as per Absorption			258696	293412	281752
(Net Income as per Variable costing +Deferred -Released)
As the Income under Absorption costing is higher than Income under variable costing,
This happens only when fixed Oh deferred with increase in ending inventory
INCREASE IN INVENTORY.
Fixed OH deferrred:
Income under Absortpion costing				268900
Less: Income under variable costing				248800
Fixed OH deferrred:				20100