Determine How Much Of The Ending Inventory Consists Of Fixed

Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period

Noreen E Brewer P Garrison R 2016 Managerial Accounting F Noreen E Brewer P Garrison R 2016 Managerial Accounting F Noreen, E., Brewer, P., & Garrison, R. (2016). Managerial accounting for managers. (4th ed.). McGraw-Hill ISBN: Review · Chapters 5 and 5a slides · Video: Absorption Costing vs. Variable Costing · Variable Costing · Absorption Costing EXERCISE 5–2 Variable Costing Income Statement; Explanation of Difference in Net Operating Income [LO 5–2] Refer to the data in Exercise 5–1 for Ida Sidha Karya Company. The absorption costing income statement prepared by the company’s accountant for last year appears below: Sales. . . . . . . . . . . . . . . . . . . . . . . $191,250 Cost of goods sold. . . . . . . . . . . . .

157,500 Gross margin. . . . . . . . . . . . . . . . . 33,750 Selling and administrative expense. . . 24,500 Net operating income. . . . . . . . . . . . $ 9,250 Required: 1. Determine how much of the ending inventory consists of fixed manufacturing overhead cost deferred in inventory to the next period. 2.

Prepare an income statement for the year using variable costing. Explain the difference in net operating income between the two costing methods. EXERCISE 5–3 Reconciliation of Absorption and Variable Costing Net Operating Incomes [LO 5–3] 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). . . . . . . . . . . . . . . . .

Ending (units). . . . . . . . . . . . . . . . . . . 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: 1. 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 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 5–4 Basic Segmented Income Statement [LO 5–4] Royal Lawncare Company produces and sells two packaged products, Weedban and Greengrow.

Revenue and cost information relating to the products follow: Product Weedban Greengrow Selling price per unit. . . . . . . . . . . . . . . . . $6.00 $7.50 Variable expenses per unit. . . . . . . . . . . . . $2.40 $5.25 Traceable fixed expenses per year. . . . . . . . $45,000 $21,000 Common fixed expenses in the company total $33,000 annually. Last year the company produced and sold 15,000 units of Weedban and 28,000 units of Greengrow. Required: 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, LO 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. Required: 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

Paper For Above instruction

Understanding the allocation and treatment of fixed manufacturing overhead (FMOH) costs in inventory valuation is critical in managerial accounting, particularly when evaluating net income differences under absorption and variable costing methods. The following discussion explicates how to determine the amount of fixed manufacturing overhead deferred in inventory at the period's end, supported by practical applications through illustrative exercises.

Determining Fixed Manufacturing Overhead Deferred in Inventory

In absorption costing, fixed manufacturing overhead costs are allocated to the cost of goods sold and inventories, which means part of the FMOH can be deferred in inventory if production exceeds sales. Conversely, under variable costing, FMOH costs are expensed in full during the period they are incurred, making inventory valuation solely dependent on variable production costs.

To calculate the amount of fixed manufacturing overhead that remains deferred in inventory at period-end, it is necessary to analyze the change in inventory levels and the fixed overhead allocated per unit. The formula for fixed manufacturing overhead deferred in inventory is typically written as:

FMOH Deferred = Change in Inventory Units × Fixed Overhead Cost per Unit

Applying this in a practical context, as shown in the case of Ida Sidha Karya Company, involves the steps outlined below:

1. Identify the change in inventory levels: Determine the beginning and ending inventory units and calculate the difference, which indicates whether inventory has increased or decreased during the period.
2. Calculate fixed manufacturing overhead per unit: Usually provided or derived from total fixed manufacturing overhead divided by total units produced.
3. Compute the deferred or released overhead: Multiply the change in inventory units by the fixed overhead per unit.

Example Exercise: Ida Sidha Karya Company

Given the final absorption costing income statement, considering production and inventory movements, the deferred fixed overhead can be estimated. Suppose the company produced 20,000 units but sold only 15,000 units, resulting in an increase in inventory by 5,000 units. If the fixed manufacturing overhead per unit is $560, then:

FMOH Deferred = 5,000 units × $560 = $2,800,000

This value indicates the fixed overhead costs that are temporarily stored in inventory, not expensed in the current period, thus elevating net income under absorption costing relative to variable costing.

Preparation of Variable Costing Income Statement and Explanation

Constructing a variable costing income statement involves deducting variable costs from sales to compute contribution margin, then subtracting fixed costs to arrive at net operating income. This method excludes fixed manufacturing overhead from inventory costs, directly expensing it in the period incurred, and consequently, the net income can fluctuate based on inventory changes.

The difference between net operating incomes under absorption and variable costing is primarily attributed to the fixed manufacturing overhead deferred in inventory. When inventory increases, absorption costing defers some fixed overhead costs, leading to higher net income compared to variable costing. Conversely, when inventory decreases, the released overhead costs reduce net income under absorption costing.

Application to Other Exercises and Practical Implications

The reconciliation of net operating income between the two methods is essential in managerial decision-making, external financial reporting, and performance analysis. For instance, in Jorgansen Lighting, Inc., understanding whether inventories increased or decreased in a given year and how much fixed overhead was deferred or released informs analysts about earnings quality and inventory management practices.

Similarly, segmented income statements, like that of Royal Lawncare, and unit costing exercises, like Lynch Company, further develop the understanding of how fixed and variable costs influence profitability and costs allocation in both internal and external reports.

Conclusion

Accurately estimating the fixed manufacturing overhead deferred in inventory requires careful analysis of inventory changes and per-unit fixed costs. Recognizing how these deferred or released overheads impact net income under different costing methods is vital for managers and financial analysts to assess true profitability, make informed decisions, and ensure transparent financial disclosures.

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