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# Reconcilliation of Absorption and Variable Costing Income

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 government. The company has provided the following data:

Year 1 Year 2 Year 3
Inventories
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. Present your answer in the form of a reconciliation report.

2. In Year 4, the company's variable net operating income was \$240,200 and its absorption costing net operating income was \$267,200. Did inventories increase or decrease during Year 4? How much fixed manufacturing overhead cost was deferred or released form inventory during Year 4?

#### Solution Summary

The solution explains how to prepare a reconcilliation of absorption and variable costing net operating income

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