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) 200 170 180
Ending (units) 170 180 220
Variable costing net operating income $1,080,400 $1,032,400 $996,400

The company's fixed manufacturing overhead per unit was constant at $560 for all three years.

Required:

a. Determine each year's absorption costing net operating income. Present your answer in the form of a reconciliation report.
b. In Year 4, the company's variable costing net operating income was $984,400 and its absorption costing net operating income was $1,012,400. Did inventories increase or decrease during Year 4? How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4?

a. Determine each year's absorption costing net operating income.

                                                Year 1                     Year 2                    Year 3

Variable costing Profit      $1,080,400             $1,032,400              $996,400

Add Closing Stock              $ 112,000                 $ 95,200              $ 100,800

Less Opening Stock           ($ 95,200)             ( $ 100,800)            ($123,200)

Absorption Costing Profit $1,097,200              $1,026,800              $974,000

b (1).  there was an Increase in Inventory

b (2). fixed manufacturing overhead cost released from inventory during Year 4 is  $28,000  

Explanation:

Year 4

Variable costing net operating income       = $984,400

Absorption costing net operating income  =  $1,012,400

Since,

Variable costing net operating income < Absorption costing net operating income

Therefore, there was an Increase in Inventory

Fixed manufacturing overhead cost released from inventory during Year 4

Absorption costing net operating income          =  $1,012,400

Less Variable costing net operating income       = ($984,400)

Fixed Costs                                                            =    $28,000  

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