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:
Year 1 Year 2 Year 3
Beginning (units) 180 150 160
Ending (units) 150 160 200
Variable costing net operating income $292,400 $269,200 $251,800
The company’s fixed manufacturing overhead per unit was constant at $450 for all three years.
1. Determine each year’s absorption costing net operating income.
2. In Year 4, the company’s variable costing net operating income was $240,200 and its absorption costing net operating income was $267,200.
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?