3. To answer this part, it is helpful to prepare a schedule of inventories,
production, and sales in units:
Beginning
Sold Ending
Inventory Units
Produced Units
Inventory
First quarter ... 4,000 15,000 12,000 7,000
Second quarter ... 7,000 9,000 15,000 1,000
Using these inventory data, the reconciliation would be as follows:
First
Quarter Second
Quarter
Variable costing net operating income... $ 4,000 $ 85,000
Deduct: Fixed manufacturing overhead cost
released from inventory during the First
Quarter (4,000 units × $12 per unit)... (48,000)
Add (deduct): Fixed manufacturing overhead
cost deferred in inventory from the First
Quarter to the Second Quarter (7,000 units
× $12 per unit) ... 84,000 (84,000)
Add: Fixed manufacturing overhead cost de-
ferred in inventory from the Second Quarter
to the future (1,000 units × $12 per unit)... 12,000
Absorption costing net operating income... $ 40,000 $ 13,000
Alternative solution:
Variable costing net operating income... $ 4,000 $85,000
ferred in inventory to the Second Quarter
(3,000 unit increase × $12 per unit) ... 36,000
released from inventory due to a decrease in
inventory during the Second Quarter (6,000
unit decrease × $12 per unit) ... (72,000)
Absorption costing net operating income... $40,000 $13,000
© The McGraw-Hill Companies, Inc., 2006. All rights reserved.
Solutions Manual, Chapter 7 393
Case 7-20 (continued)
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