Question

Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $24 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)		2,300			2,300
Production (in units)		2,800			1,800
Production costs:
Variable manufacturing costs	$	13,160		$	8,460
Fixed manufacturing overhead		15,960			15,960
Selling and administrative costs:
Variable		9,200			9,200
Fixed		8,200			8,200

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	$	5,200		$	0
Retained earnings		8,380			13,860
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	2,350		$	0
Retained earnings		5,530			13,860

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)

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)

Show less

	Year 1 Year 2 Subtotal Total $0 $0 Difference in operating income $0 $0

	Options: Cost of goods sold under absorption costing Fixed manufacturing overhead as period expense under variable costing Sales revenue Variable manufacturing costs under variable costing Variable selling and administrative cost

Answer 1

Answer:

Income statement under Absorption Costing:

Income statement under Variable costing:

Reconciliation of 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):