Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $25 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 Lehightons first two years of operation is as follows:

	Year 1			Year 2
Sales (in units)		2,600			2,600
Production (in units)		3,100			2,100
Production costs:
Variable manufacturing costs	$	15,500		$	10,500
Fixed manufacturing overhead		18,600			18,600
Selling and administrative costs:
Variable		10,400			10,400
Fixed		9,400			9,400

Selected information from Lehightons 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	$	5,500		$	0
Retained earnings		11,100			19,000
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	2,500		$	0
Retained earnings		8,100			19,000

Required:

1. Reconcile Lehightons 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 Lehightons 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".

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).

Year 1 Year 2 Subtotal Total 0 $ 0 Difference in operating income Total Operating Income Absorption costing Variable costing Total Sales Revenue Absorption costing Variable costing Costs Expensed Absorption costing Variable costing Amount Absorption costing Variable costing Sales revenue is different depending on the costing method used. Timing is the key in distinguishing between absorption and variable costing Since Lehighton's combined operating income, across the two-year period, is the same under both absorption and variable costing, then the operating income must be the same within each year under both methods. The difference between absorption and varible costing is caused by the timing with which expenses are recognized. LEHIGHTON CHALK COMPANY Income Statement Year 1 Year 2 Cost of goods sold: LEHIGHTON CHALK COMPANY Income Statement Year 1 Year 2 Cost of goods sold: Total variable costs Fixed costs: Total fixed costs Absorption- minus variable- Difference in fixed overhead Actual fixed- overhead Change in Inventory (in units) Year costing operating income rate expensed 1 2 X