EXERCISE 5-3 Reconciliation of Absorption and Variable Costing Net Operating Incomes [LO 5-3J

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:

Inventories: Year 1 Year 2 Year 3

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:

L Determine each year’s absorption costing net Operating income. Present your answer in the form of a reconciliation report,

2. In Year 4. the company’s variable costing net Operating income was $984,400 and its absorp¬tion costing net operating income was $1,012,400. Did inventories increase or decrease dur-

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

EXERCISE 5-4 Basle Segmented Income Statement [LO 5-11

Royal Lawncare Company produces and sells two packaged products, weedban and Greengrow. Revenue and cost information relating to the products follow:


Selling price per unit ……….. Vat Int)le expenses per unit . .

Tracecable fixed oxpenses pet yemt Weedban Greengrow

$6.00 $7.50

$2.40 $5.25

$45,000 $21,000


Variable Costing and Segment Reporting: Tools for Management Common fixed expenses in the company total $33.(XX) annually. Last year the company produced and sold 15,000 units of Weedban and 28,0(X) units of Grccngrow.


Prepare a contribution format income statement segmented by product lines.

EXERCISE 5-6 Variable and Absorption Costing Unit Product Costs and Income Statements [LO 5-1, 10 5-2]

Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

Variable costs per unit: Manufacturing:

Direct materials   $6

Direct labor $9

Variable manufacturing overhead   $3

Variable selling and administrative $4

Fixed costs per year:

Fixed manufacturing overhead $300,000

Fixed selling and administrative $190,000

During the year, the company produced 25,000 units and sold 20,000 units. The selling price of the company’s product is $50 per unit.


1. Assume that the company uses absorption costing:

a. Compute the unit product cost.

b. Prepare an income statement for the year.

2. Assume that the company uses variable costing:

a. Compute the unit product cost.

b. Prepare an income statement for the year.\

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