Question

Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $22 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)		2,400			2,400
Production (in units)		3,000			1,800
Production costs:
Variable manufacturing costs	$	11,100		$	6,660
Fixed manufacturing overhead		14,100			14,100
Selling and administrative costs:
Variable		9,600			9,600
Fixed		8,600			8,600

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	$	5,040		$	0
Retained earnings		8,940			15,040
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	2,220		$	0
Retained earnings		6,120			15,040

Required:
1. (ALREADY DONE) 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)

Year 1 Year 2 Cost of goods sold under absorption costing $20,160 $25,800 Variable manufacturing costs under variable costing 8,880 8,880 Subtotal $11,280 $16,920 Fixed manufacturing overhead as period expense under variable costing 14,100 14,100 Total $(2,820) $2,820 Operating income under variable costing $11,620 $11,620 Less: Operating income under absorption costing 14,440 8,800 Difference in operating income $(2,820) $2,820

2. What was Lehighton’s total operating income across both years under absorption costing and under variable costing?

	Total Operating Income Absorption costing Variable costing

3. What was the total sales revenue across both years under absorption costing and under variable costing?

	Total Sales Revenue Absorption costing 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