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)		2,500			2,500
Production (in units)		3,100			1,900
Production costs:
Variable manufacturing costs	$	15,190		$	9,310
Fixed manufacturing overhead		18,290			18,290
Selling and administrative costs:
Variable		10,000			10,000
Fixed		9,000			9,000

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	$	6,480		$	0
Retained earnings		11,000			17,720
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	2,940		$	0
Retained earnings		7,460			17,720

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".

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)

Show less

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

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

6)

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

Sales revenue is different depending on the costing method used. Timing is the key in distinguishing between absorption and variable costing. Since Lehighton's combined operating income, across the two-year period, is the same under both absorption and variable costing, then the operating income must be the same within each year under both methods. The difference between absorption and varible costing is caused by the timing with which expenses are recognized.

Answer 1

All requirements are included in the following income statement, prepared under both, absorption costing and variable costing. Reconciliations and explanations are also added separately. In the last question, statements 2 and 4 are correct. Irrespective of the aproach, sales income remains the same