Question

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.

Considering the results obtained in requirements 1-5 above, select which of the following statements (is) are true by selecting an "X".

Answer 1

Absorption Costing Income Statement:
	Year 1	Year2	calculation
Sales	2900	2900
Production	3300	2500
Sales dollar	72500	72500
Less:Manufacuring exp
Variable	13860	10500
Fixed	17160	17160
Total Manuf cost	31020	27660
Less: CS adjustment	-2080	2080	17160*400/3300
Net Manuf costs	28940	29740
Gross profit	43560	42760
Less: Adm& Selling exp.:
Variable+Fixed	22200	22200
NOI	21360	20560
Variable Costing Income Statement:
	Year 1	Year2
Sales	2900	2900
Production	3300	2500
Sales dollar	72500	72500
Less:Variable exp.:
Manuf.	13860	10500
Selling & Adm	11600	11600
Total variable cost	25460	22100
Contribution	47040	50400
Less: Fixed costs:
Manuf.	17160	17160
Selling & Adm	10600	10600
Total Fixed costs	27760	27760
NOI	19280	22640
RECONCILIATION:
NOI as per absorption :	21360	20560
add/lessCS adjustment	-2080	2080
NOI as per Variable:	19280	22640
total Operating income:
NOI as per absorption :	21360	20560
NOI as per Variable:	19280	22640
total sales revenues:
NOI as per absorption :	72500	72500
NOI as per Variable:	72500	72500
Total cost expensed on OI:
Absorption	51140	51940
Variable	53220	49860
Resultant NOI:
NOI as per absorption :	21360	20560
NOI as per Variable:	19280	22640