366 I [Case 844 I Absorption an ariabie Costing; Effect on the Bal once Street: Continuation of Preceding Case " (LO 8-1, 8-4) 4. Absorption costing. nrsbedgoods inventory. end ofyear 1: $10,500 5. Variable costing, reported operating income foryear 2, $20,500 Chapter 8 Variable Costing and the Measurement of E86 and Quality Costs 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. Comment on the results obtained in requirements 1, 2, 3, and 4 in light of the following assertion: Timing is the key in distinguishing between absorption and variable carting. 7ZQ1VE C55; 9.44 wim ianIW-n Refer to the information given in Case 842 for Lehighton Chalk Company. Selected information from Lehighton's year-end balance sheets for its rst two years of operation is as follows: LEHIGHTOII CHALK COMPANY Selected Balance Sheet Infomon Based on absorption costing End of Year 1 End of Year 2 Finished'goods inventory $0,500 $ 0 Retained earnings ............................................................................................................ 16,500 24,600 Based on variable costing End of Year 1 End of Year 2 Finisnsdegoods inventory ............................................................ $ 3,500 l 0 Retained earnings ....................................................................... 9.500 24,600 Required: 1. Why is the year 1 ending balance in nished-goods inventory higher if absorption costing is used than if variable costing is used? 2. Why is the year 2 ending balance in nished-goods inventory the same under absorption and vari- able costing? 3. Notice that the ending balance of nished-goods inventory under absorption costing is greater than or equal to the ending finishedgoods inventory balance under variable costing for both years I and 2. Will this relationship 21le hold true at any balance sheet date? Explain. 4. Compute the amount by which the year-end balance in nished-goods inventory declined during year 2 (i.e., between December 31 of year I and December 3] of year 2): o 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 flishedngOdS inventory declined under absorption versus variable costing. Then compare the amount of this difference with the difference in the company's reported operat- ing income for year 2 under absorption versus variable costing. (Refer to the operating income statements prepared in Case 842.) 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 thisrelationship hold true at any balance sheet dale? Explain. Cases Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $50 per unit. Lehighton uses an actual costing system, which means that the actual costs of direct material, direct Case 8-42 labor, and manufacturing overhead are entered into work-in-process inventory. The actual application Comparison of Absorption rate for manufacturing overhead is computed each year; actual manufacturing overhead is divided by and Variable Costing; Actual actual production (in units) to compute the application rate. Information for Lehighton's first two years Costing of operation is as follows: (LO 8-2, 8-3, 8-4) Year 1 Year 2 1. Operating income, year 1: Sales (in units) ........ 2,500 2,500 $27,500 Production (in units) . 3,000 2,000 2. Operating income, year 2: $20,500 Production costs: Variable manufacturing costs $21,000 $14,000 Fixed manufacturing overhead 42,000 42,000 Ex Selling and administrative costs: Variable .. 25,000 25,000 Fixed 20,000 20,000 Required: 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