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:

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 $560 for all three years.

Required:

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

Explanation

1.

	Year 1		Year 2		Year 3
Beginning inventories		210		160		180
Ending inventories		160		180		230
Change in inventories		(50)		20		50
Fixed manufacturing overhead in ending inventories (@$560 per unit)	$	89,600	$	100,800	$	128,800
Fixed manufacturing overhead in beginning inventories (@$560 per unit)		117,600		89,600		100,800
Fixed manufacturing overhead deferred in (released from) inventories (@$560 per unit)	$	(28,000)	$	11,200	$	28,000
Variable costing net operating income	$	290,000	$	279,000	$	250,000
Add (deduct) fixed manufacturing overhead cost deferred in (released from) inventory under absorption costing		(28,000)		11,200		28,000
Absorption costing net operating income	$	262,000	$	290,200	$	278,000

2. Assume in Year 4 that the company’s variable costing net operating income was $250,000 and its absorption costing net operating income was $280,000.

a. Did inventories increase or decrease during Year 4?

Explanation

2a. & 2b.

Because absorption costing net operating income was greater than variable costing net operating income in Year 4, inventories must have increased during the year and, hence, fixed manufacturing overhead was deferred in inventories. The amount of the deferral is the difference between the two net operating incomes, or $30,000 = $280,000 – $250,000.

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