Refer to the information given in Case 8-31 for Lehighton Chalk Company. Selected information from Lehighton's year-end

Question:

Refer to the information given in Case 8-31 for Lehighton Chalk Company. Selected information from Lehighton's year-end balance sheets for its first two years of operation is as follows:

Required:
1. Why is the year 1 ending balance in finished-goods inventory higher if absorption costing is used than if variable costing is used?
2. Why is the year 2 ending balance in finished-goods inventory the same under absorption and variable costing?
3. Notice that the ending balance of finished-goods inventory under absorption costing is greater than or equal to the ending finished-goods inventory balance under variable costing for both years 1 and 2. Will this relationship always hold true at any balance sheet date? Explain.
4. Compute the amount by which the year-end balance in finished-goods inventory declined during year 2 (i.e., between December 31 of year 1 and December 31 of year 2):
€¢ Using the data from the balance sheet prepared under absorption costing.
€¢ Using the data from the balance sheet prepared under variable costing.
5. Refer to your calculations from requirement (4). Compute the difference in the amount by which the year-end balances in finished-goods inventory declined under absorption versus variable costing. Then compare the amount of this difference with the difference in the company's reported income for year 2 under absorption versus variable costing.
6. Notice that the retained earnings balance at the end of both years 1 and 2 on the balance sheet prepared under absorption costing is greater than or equal to the corresponding retained earnings balance on the statement prepared under variable costing. Will this relationship hold true at any balance sheet date? Explain.