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Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $25 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)		2,900			2,900
Production (in units)		3,300			2,500
Production costs:
Variable manufacturing costs	$	13,860		$	10,500
Fixed manufacturing overhead		17,160			17,160
Selling and administrative costs:
Variable		11,600			11,600
Fixed		10,600			10,600

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	$	3,760		$	0
Retained earnings		17,540			33,720
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	1,680		$	0
Retained earnings		15,460			33,720

Required:

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)

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

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

What was the total of all costs expensed on the operating income statements across both years under absorption costing and under variable costing?

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.

Answer 1

working
	Year 1	Year 2
Sales (in units)	2,900	2,900
Production (in units)	3,300	2,500
Production costs:
Variable manufacturing costs	13,860	10,500
Fixed manufacturing overhead	17,160	17,160
	31,020	27,660
Selling and administrative costs:
Variable	11,600	11,600
Fixed	10,600	10,600
	22,200	22,200
Absorption Costing
Year 1
Sales (2900*$25)		72500
Less: Cost of good sold
Total manufacturing cost	31,020
Less: ending Inventory	3760
Cost of good sold		27,260
Gross profit		45,240
Less: selling & adm expenses		22,200
Net operating income		23,040
Year 2
Sales (2900*$25)		72500
Less: Cost of good sold
Beginning Inventory	3760
Total manufacturing cost	27,660
Less: ending Inventory	0
Cost of good sold		31,420
Gross profit		41,080
Less: selling & adm expenses		22,200
Net operating income		18,880
Variable costing
Yaer 1
Sales (2900*$25)			72500
Less: Variable cost
Variable manufacturing costs	13,860
Less: ending Inventory	1680	12,180
Variable Selling and administrative costs		11600
Total variable cost			23,780
Contribution margin			48,720
Fixed manufacturing overhead		17,160
Fixed selling & adm expenses		10,600
Total fixed expenses			27,760
Net operating income			20,960
Year 2
Sales (2900*$25)			72500
Less: Variable cost
Beginning Inventory	1680
Variable manufacturing costs	13,860
Less: ending Inventory	0	15,540
Variable Selling and administrative costs		11600
Total variable cost			27,140
Contribution margin			45,360
Fixed manufacturing overhead		17,160
Fixed selling & adm expenses		10,600
Total fixed expenses			27,760
Net operating income			17,600
answer
Net operating Income as per absorption costing			23,040
Less: Fixed manufacturinbg overhead deferred in ending Inventory			-2,080
Net operating Income as per variable costing			20,960
Net operating Income as per absorption costing			18,880
Less: Fixed manufacturinbg overhead deferred in beginning Inventory			-1,280
Net operating Income as per variable costing			17,600
ans Net Operating income
	Year 1	Year 2
Absorption costing	23,040	18,880
Variable costing	20,960	17,600
ans Total sales revenue
	Year 1	Year 2
Absorption costing	72,500	72,500
Variable costing	72,500	72,500
ans Total cost expenses
	Year 1	Year 2
Absorption costing	49,460	53,620
	(27260+22200)	(22200+31420)
Variable costing	51,540	54,900
	(23780+27760)
ans	Year 1	Year 2
Absorption costing
Total sales revenue	72,500	72,500
Less: T0tal cost expenses	49,460	53,620
Net operating Income	23,040	18,880
Variable costing
Total sales revenue	72,500	72,500
Less: T0tal cost expenses	51,540	54,900
Net operating Income	20,960	17,600