Question

Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $28 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)		3,100			3,100
Production (in units)		3,700			2,500
Production costs:
Variable manufacturing costs	$	20,350		$	13,750
Fixed manufacturing overhead		24,790			24,790
Selling and administrative costs:
Variable		12,400			12,400
Fixed		11,400			11,400

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	$	7,320		$	0
Retained earnings		19,680			34,120
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	3,300		$	0
Retained earnings		15,660			34,120

Required:

Lehighton Chalk Company had no beginning or ending work-in-process inventories for either year.

1. Prepare operating income statements for both years based on absorption costing.

2. Prepare operating income statements for both years based on variable costing.

3. Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2).

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2
• Required 3

Prepare operating income statements for both years based on absorption costing.

	LEHIGHTON CHALK COMPANY Income Statement Year 1 Year 2 Cost of goods sold: $0 $0 $0 $0 $0 $0

Prepare operating income statements for both years based on variable costing.

	LEHIGHTON CHALK COMPANY Income Statement Year 1 Year 2 Cost of goods sold: $0 $0 Total variable costs: $0 $0 $0 $0 Fixed costs: Total fixed costs $0 $0 $0 $0

Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2).

	Year Change in Inventory (in units) Actual fixed-overhead rate Difference in fixed overhead expensed Absorption- minus variable-costing operating income 1 × 2 ×

Answer 1

1)	INCOME STATEMENT
		Year 1	Year 2
	Sales	86800	86800
	Cost of good sold:
	Beginning FG inventory	0	7320
	Cost of goods produced (20350+24790)	45140	38540
	Cost of goods available for sale	45140	45860
	Ending FG inventory	7320	0
	Cost of goods sold	37820	45860
	Gross profit	48980	40940
	Selling and administrative costs (12400+11400)	23800	23800
	Net operating income	25180	17140
2)	Sales	86800	86800
	Cost of good sold:
	Beginning FG inventory	0	3300
	Variable manufacturing costs	20350	13750
	Cost of goods available for sale	20350	17050
	Ending FG inventory	3300	0
	Variable cost of goods sold	17050	17050
	Variable selling and administrative expenses	12400	12400
	Total variable costs	29450	29450
	Contribution margin	57350	57350
	Fixed Costs:
	Manufacturing	24790	24790
	Selling and administrative	11400	11400
	Total fixed costs	36190	36190
	Net operating income	21160	21160
3)	Year	Change in Inventory (Units)		Actual fixed overhead rate	Difference in fixed overhead expensed	Absorption-minus variable-costing operating income
	1		600	$           6.70	$                 -4,020	4020
	2		-600	$           9.92	$                  4,020	-4020