High country inc produces and sells many recreational products

EXERCISE 7–3 Reconciliation of Absorption and Variable Costing Net Operating Incomes [LO3]

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:

The company’s fixed manufacturing overhead per unit was constant at $560 for all three years.

Required:

1. Determine each year’s absorption costing net operating income. Present your answer in the form of a reconciliation report as shown in Exhibit 7–4.
2. In Year 4, the company’s variable costing net operating income was $984,400 and its absorption costing net operating income was $1,012,400. Did inventories increase or decrease during Year 4? How much fixed manufacturing overhead cost was deferred or released from inventory during Year 4?
EXERCISE 7–4 Evaluating Absorption and Variable Costing as Alternative Costing Methods

The questions below pertain to two different scenarios involving a manufacturing company. In each scenario, the cost structure of the company is constant from year to year. Selling prices, unit variable costs, and total fixed costs are the same in every year. However, unit sales and/or unit production levels may vary from year to year.

Required:

a. Were unit sales constant from year to year? Explain.
b. What was the relation between unit sales and unit production levels in each year? For each year, indicate whether inventories grew or shrank.
· 2. Consider the following data for scenario B:

· a. Were unit sales constant from year to year? Explain.
b. What was the relation between unit sales and unit production levels in each year? For each year, indicate whether inventories grew or shrank.
· 3. Given the patterns of net operating income in scenarios A and B above, which costing method, variable costing or absorption costing, do you believe provides a better reflection of economic reality? Explain.

EXERCISE 7–7 Variable Costing Income Statement; Reconciliation [LO2, LO3]

Whitman Company has just completed its first year of operations. The company’s absorption costing income statement for the year appears below:

The company’s selling and administrative expenses consist of $210,000 per year in fixed expenses and $2 per unit sold in variable expenses. The $16 per unit product cost given above is computed as follows:

Required:

1. Redo the company’s income statement in the contribution format using variable costing.
2. Reconcile any difference between the net operating income on your variable costing income statement and the net operating income on the absorption costing income statement above.
PROBLEM 7–12 Variable and Absorption Costing Unit Product Costs and Income Statements; Explanation of Difference in Net Operating Income [LO1, LO2, LO3]

High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant’s operation:

Management is anxious to see how profitable the new camp cot will be and has asked that an income statement be prepared for May.

Required:

1. Assume that the company uses absorption costing.
a. Determine the unit product cost.
b. Prepare an income statement for May.
2. Assume that the company uses variable costing.
a. Determine the unit product cost.
b. Prepare a contribution format income statement for May.
3. Explain the reason for any difference in the ending inventory balances under the two costing methods and the impact of this difference on reported net operating income.