Question - Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $23 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-An-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)
|
3,000
|
2,000
|
|
Production costs:
|
|
|
|
Variable manufacturing costs
|
$11,400
|
$7,600
|
|
Fixed manufacturing overhead
|
14,400
|
14,400
|
|
Selling and administrative costs:
|
|
|
|
Variable
|
10,000
|
10,000
|
|
Fixed
|
9,000
|
9,000
|
Selected information from Lehigh tons 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
|
$4,300
|
$0
|
|
Retained earnings
|
11,500
|
21,000
|
|
Based on variable costing
|
End of Year 1
|
End of Year 2
|
|
Finished-goods inventory
|
$1,900
|
$0
|
|
Retained earnings
|
9,100
|
21,000
|
Required -
Part A -
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)
2. What was Lehighton's total operating income across both years under absorption costing and under variable costing?
3. What was the total sales revenue across both years under absorption costing and under 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?
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.
6. Considering the results obtained in requirements 1-5 above, select which of the following statements (is) are true by selecting an "X".
Part B - Lehighton Chalk Company had no beginning or ending work-in-process inventories for either year
1. Prepare operating income statements for both years based on absorption costing.
2. Prepare operating income statements for both years based on variable costing.
3. Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2).