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) 200 160 180
Ending (units) 160 180 220
Variable costing net operating income $300,000 $269,000 $250,000

The company’s fixed manufacturing overhead per unit was constant at $564 for all three years.

Required:
a. Determine each year’s absorption costing net operating income.
b. In Year 4, the company’s variable costing net operating income was $249,100 and its absorption costing net operating income was $261,600.

i. Did inventories increase or decrease during Year 4?
ii. How much fixed manufacturing overhead cost was deferred in or released from inventory during Year 4?

a.Year 1 = $277,440,   Year 2 =  $280,280,  Year 3 = $272,560

b.i. Inventory Increased in year 4

b.ii $12,500 deferred in inventory

Explanation:

Absorption Costing  Income for Year 1, Year 2, Year 3

Hint: Reconcile the Variable Costing Income to Absorption Costing Income

                                                         Year 1            Year 2         Year 3

Variable Costing Income             $300,000    $269,000     $250,000

Add Closing Inventory                    $90,240      $101,520      $124,080

Less Opening Inventory               ($112,800)     ($90,240)     ($101,520)

Absorption Costing Income         $277,440     $280,280      $272,560

Here we are adding and subtracting the fixed manufacturing overhead in closing and opening inventory.

This is because difference in Variable Costing Income and  Absorption Costing Income lies within fixed manufacturing costs included in inventory.

Inventory Increased in year 4

Inventory deferred in Inventory = $261,600 - $249,100

                                                        = $12,500

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