Question

[The following information applies to the questions displayed below.) Huron Chalk Company manufactures sidewalk chalk which it sells online by the box at $26 per unit. Huron 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 Huron's first two years of operations is as follows: Year 1 2,700 3,100 Year 2 2,700 2,300 $15.810 $ 11,730 Sales (in units) Production (in units) Production costs: Variable manufacturing costs Fixed manufacturing overhead Selling and administrative expenses: Variable Fixed 18,910 18,910 10,800 9,800 10,800 9,800 Selected information from Huron's year-end balance sheets for its first two years of operation is as follows: HURON CHALK COMPANY Selected Balance Sheet Information Based on absorption End of Year 1 End of Year 2 costing Finished-goods inventory $ 4,480 $ 0 Retained earnings* 13,860 25,640 Based on variable costing End of Year 1 End of Year 2 Finished-goods inventory $ 2,040 $ 0 Retained earnings* 11,420 25,640 * For convenience, assume that dividends for Year 1 is $5,500 and Year 2 is $2,700. No taxes or other expenses were incurred for both the years.

Answer 1

4.

Absorption Costing	$     4,480.00
Variable Costing	$     2,040.00

5.

Amount of decline in finished goods inventory balance during year 2	$     2,440.00	=4480-2040
Reported Operating income for Year 2	$    -2,440.00	=14480-16920

6.
Answer is a.
Yes this relationship will hold true at any balance sheet date because income reported under absorption costing will exceed income reported under variable costing in any period during which the amount of inventory increases.

This is because as inventory increases, fixed overhead for ending inventory is carried forward in absorption costing