Exercise 7-3 (Algo) Reconciliation of Absorption and Variable Costing Net Operating Incomes [LO7-3]

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Jorgansen Lighting, Incorporated, 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)	210	160	200
Ending (units)	160	200	220
Variable costing net operating income	$ 290,000	$ 269,000	$ 260,000

The companys fixed manufacturing overhead per unit was constant at $570 for all three years.

Exercise 7-3 (Algo) Part 1 & 2

Required:

1. Calculate each years absorption costing net operating income. (Enter any losses or deductions as a negative value.)

2. Assume in Year 4 that the companys variable costing net operating income was $260,000 and its absorption costing net operating income was $300,000.

a. Did inventories increase or decrease during Year 4?

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