High Tension Transformers, Inc., manufactures heavy-duty transformers for electr
ID: 2469919 • Letter: H
Question
High Tension Transformers, Inc., manufactures heavy-duty transformers for electrical switching stations. 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:
Determine each year’s absorption costing net operating income. (Amounts to be deducted should be indicated with a minus sign.)
In Year 4, the company’s variable costing net operating income was $240,200 and its absorption costing net operating income was $267,200.
How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4?
[The following information applies to the questions displayed below.]Explanation / Answer
1./
ADD: FIXED MANUFACTURING OVERHEAD COST DEFERRED IN INVENTORY UNDER ABSORPTION COSTING
10 UNITS × $450 PER UNIT
40 UNITS × $450 PER UNIT
LESS FIXED MANUFACTURING OVERHEAD COST RELEASED FROM INVENTORY UNDER ABSORPTION COSTING
(30 UNITS × $450 PER UNIT)
2./
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.
B./
THE AMOUNT OF THE DEFERRAL IS JUST THE DIFFERENCE BETWEEN THE TWO NET OPERATING INCOMES
$27000 = $267200 – $240200.
YEAR 1 YEAR 2 YEAR 3 BEGINNING INVENTORIES 180 150 160 ENDING INVENTORIES 150 160 200 CHANGE IN INVENTORIES (30) 10 40 VARIABLE COSTING NET OPERATING INCOME $292400 $269200 $251800ADD: FIXED MANUFACTURING OVERHEAD COST DEFERRED IN INVENTORY UNDER ABSORPTION COSTING
10 UNITS × $450 PER UNIT
40 UNITS × $450 PER UNIT
$4500 $18000LESS FIXED MANUFACTURING OVERHEAD COST RELEASED FROM INVENTORY UNDER ABSORPTION COSTING
(30 UNITS × $450 PER UNIT)
($13500) ABSORPTION COSTING NET OPERATING INCOME $278900 $273700 $269800Related Questions
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