Question

Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $22 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)		2,400			2,400
Production (in units)		3,000			1,800
Production costs:
Variable manufacturing costs	$	11,100		$	6,660
Fixed manufacturing overhead		14,100			14,100
Selling and administrative costs:
Variable		9,600			9,600
Fixed		8,600			8,600

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	$	5,040		$	0
Retained earnings		8,940			15,040
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	2,220		$	0
Retained earnings		6,120			15,040

1. Prepare operating income statements for both years based on variable costing.

Lehighton Chalk Company

Income statement

YEAR 1                                         YEAR 2

Chose I · Cost of goods available for sale · Cost of goods manufactured · Sales revenue · Selling and administrative expenses Choose for #1-6 Cost of goods sold · Beginning finished-goods inventory · Cost of goods available for sale · Cost of goods manufactured · Cost of goods sold 1. 2. 3. 4. 5. 6. Total variable cost: $ $ Choose 1 · Contribution margin · Contribution loss · Gross margin · Gross loss $ $ Fixed Cost: Choose for #s1 & 2 · Cost of goods available for sale · Cost of goods manufactured · Fixed manufacturing costs · Fixed selling and administrative expenses 1. $ $ 2. $ $ Total Fixed : $ $ Choose 1 · Operating income · Operating loss $ $

2. Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2).

year	Change in inventory (units)		Actual fixed-overhead rate	Difference in fixed overhead expense	Absorption minus variable costing operating income
1.__________	Increase or decrease-----	X	______	_____	_____
2.__________	Increase or decrease-----	X	______	_____	_____

Answer 1