Exercise 6-3 Reconciliation of Absorption and Variable Costing Net Operating Inc
ID: 2531216 • Letter: E
Question
Exercise 6-3 Reconciliation of Absorption and Variable Costing Net Operating Incomes [LO6-3]
[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:
The company’s fixed manufacturing overhead per unit was constant at $550 for all three years.
Exercise 6-3 Part 2
2. Assume in Year 4 that the company’s variable costing net operating income was $240,000 and its absorption costing net operating income was $270,000.
a. Did inventories increase or decrease during Year 4?
Increase
Decrease
b. How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4?
Year 1 Year 2 Year 3 Inventories Beginning (units) 220 170 190 Ending (units) 170 190 220 Variable costing net operating income $290,000 $279,000 $250,000Explanation / Answer
year 1 year 2 year 3 inventories Beginning(units) 220 170 190 Ending (units) 170 190 220 Difference (a) -50 20 30 FOH per unit (b) 550 550 550 Deferred (released)c=a*b -27500 11000 16500 1) Reconciliation of variable costing and Absorption costing Net operating income year 1 year 2 year 3 Variable costing net operating income 290,000 279,000 250,000 Add(Deduct)Fixed manufacturing overhead -27500 11000 16500 deferredin (released from)inventory Absorption costing net operating income 262,500 290,000 266,500 2a) increase (because absorption costing income is more than variable costing) b) fixed manufacturing overhead cost Deferred inventory during year 4 $30,000