5. a. Under JIT, production would have been geared to sales. Hence inven-
tories would not have been built up in Year 2.
b. Under JIT, the net operating income for Year 2 using absorption cost-
ing would have been $40,000—the same as in Year 1. With produc-
tion geared to sales, there would have been no inventory buildup at
the end of Year 2 and therefore there would have been no fixed
manufacturing overhead costs deferred in inventory. The entire
$300,000 in fixed manufacturing overhead costs would have been
charged against Year 2 operations, rather than having $60,000 of it
deferred to future periods through the inventory account. Thus, net
operating income would have been about the same in each year un-
der both variable and absorption costing.
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Solutions Manual, Chapter 7 375
Problem 7-16 (30 minutes)
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