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 Lehightons 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 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 $ 5,040 $ 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 Required 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 Amount of Decline Absorption costing 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 companys reported operating income for year 2 under absorption versus variable costing Amount of Difference Amount of decline in finished goods inventory balance during year 2 Reported operating income for year 2 (absorption versus variable costing)

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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

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 Lehightons 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 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	$	5,040	$	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

Required: 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.

	Amount of Decline
Absorption costing
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 companys reported operating income for year 2 under absorption versus variable costing.

	Amount of Difference
Amount of decline in finished-goods inventory balance during year 2
Reported operating income for year 2 (absorption versus variable costing)