Question

Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $23 per unit. Lehighton uses an actual costing system, which means that the actual costs of direct material, direct labor, and manufacturing overhead are entered into work-in-process inventory. The actual application rate for manufacturing overhead is computed each year; actual manufacturing overhead is divided by actual production (in units) to compute the application rate. Information for Lehighton’s first two years of operation is as follows:

	Year 1			Year 2
Sales (in units)		2,500			2,500
Production (in units)		3,000			2,000
Production costs:
Variable manufacturing costs	$	11,400		$	7,600
Fixed manufacturing overhead		14,400			14,400
Selling and administrative costs:
Variable		10,000			10,000
Fixed		9,000			9,000

Selected information from Lehighton’s year-end balance sheets for its first two years of operation is as follows:

LEHIGHTON CHALK COMPANY
Selected Balance Sheet Information
Based on absorption costing	End of Year 1			End of Year 2
Finished-goods inventory	$	4,300		$	0
Retained earnings		11,500			21,000
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	1,900		$	0
Retained earnings		9,100			21,000

Required:
1. Reconcile Lehighton’s operating income reported under absorption and variable costing, during each year, by comparing the following two amounts on each income statement:

• Cost of goods sold
• Fixed cost (expensed as a period expense)

2. What was Lehighton’s total operating income across both years under absorption costing and under variable costing?
3. What was the total sales revenue across both years under absorption costing and under variable costing?
4. What was the total of all costs expensed on the operating income statements across both years under absorption costing and under variable costing?

	Costs Expensed Absorption costing Variable costing

5. Subtract the total costs expensed across both years (requirement 4) from the total sales revenue across both years (requirement 3): (a) under absorption costing and (b) under variable costing.

	Amount Absorption costing Variable costing

Answer 1

Please give LIKE if you're satisfied by the answer.

If you have any queries please mention it into the comments box.