Question

Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $26 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)		2,800			2,800
Production (in units)		3,400			2,200
Production costs:
Variable manufacturing costs	$	17,680		$	11,440
Fixed manufacturing overhead		21,080			21,080
Selling and administrative costs:
Variable		11,200			11,200
Fixed		10,200			10,200

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	$	6,840		$	0
Retained earnings		13,980			23,320
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	3,120		$	0
Retained earnings		10,260			23,320
Required: Lehighton Chalk Company had no beginning or ending work-in-process inventories for either year. Prepare operating income statements for both years based on absorption costing. Prepare operating income statements for both years based on variable costing. Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2). QUESTION: Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2). NOTE: The second box under "Change in Inventory" has a multiple selection to the right which is either selecting increase or decrease. Year Change in Inventory (in units) Actual fixed-overhead rate Difference in fixed overhead expensed Absorption- minus variable-costing operating income 1 select: increase or decrease × 2 select: increase or decrease ×

Answer 1

Variable Costing		Year 1	Year 2
Sales Revenue	2800*26	72800	72800
Variable Cost
Beginning Inventory	Given	0	3120
Variable Manufacturing cost		17680	11440
Cost of Goods available for Sale	Beginning+Variable	17680	14560
Ending Inventory	600*5.2	3120	0
Variable Cost of goods Sold		14560	14560
Variable Selling Cost		11200	11200
Total Variable Cost		25760	25760
Contributiofn Margin		47040	47040
Fixed Cost:
Fixed Manuf	GIven	21080	21080
Fixed Selling	GIven	10200	10200
Net Operating Income		15760	15760
Absorption Costing		Year 1	Year 2
Sales Revenue	2800*26	72800	72800	Fixed Cost/Prod*Sale unit
Variable Cost
Beginning Inventory	Given	0	6840
Variable Manufacturing cost		17680	11440
Allocated Fixed Manu Cost	2800*per unit cost 6.2 and 9.58	17360	17360
Cost of Goods available for Sale	Beginning+Variable+Fixed	35040	35640
Ending Inventory	600*11.4	6840	0
Adjustment for prod vol variance		3720	3720
Cost of goods Sold		31920	39360
Gross Margin		40880	33440
Operating Cost:
Variable Selling		11200	11200
Fixed Selling		10200	10200
Net Operating Income		19480	12040
	Net Operating Income
	Year 1	Year 2
Absorption	19480	12040
Variable	15760	15760
Difference	3720	-3720
Less: Fixed Manu cost in Ending inventory	3720	0
(600*5.2)
Add: Fixed Manu cost in beginning inventory		3720
(600*5.2)
Reco	0	0

Working

Variable Manufacturing cost	17680	11440
Fixed Manufacturing cost	21080	21080
Production Units	3400	2200
Variable Manufacturing cost Per Unit	5.2	5.2
Fixed Manufacturing cost Per unit	6.2	6.20	it will be same as fixed cost same for both years and budgeted prouction to be taken 3400 of first year
Total Cost Per unit	11.4	11.40
Variable	Year 1	Year 2	Absorption	Year 1	Year 2
Beginning	0	600		0	600
Production	3400	2200		3400	2200
Sale	2800	2800		2800	2800
Closing	600	0		600	0