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	190
Ending (units)	170	190	230
Variable costing net operating income	$290,000	$279,000	$250,000

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

Exercise 6-3 Part 1

Required:

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

Answer is complete but not entirely correct.

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
	Year 1	Year 2	Year 3
Variable costing net operating income	$290,000 selected answer correct	$279,000 selected answer correct	$250,000 selected answer correct
Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing	17,100 selected answer incorrect	11,400 selected answer correct	22,800 selected answer correct
Absorption costing net operating income	$272,900 selected answer correct	$267,600 selected answer incorrect	$227,200 selected answer incorrect

2. Assume in Year 4 that the companys variable costing net operating income was $250,000 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?

Fixed manufacturing overhead cost

inventory during Year 4