Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $26 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)		2,800			2,800
Production (in units)		3,400			2,200
Production costs:
Variable manufacturing costs	$	17,680		$	11,440
Fixed manufacturing overhead		21,080			21,080
Selling and administrative costs:
Variable		11,200			11,200
Fixed		10,200			10,200

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	$	6,840		$	0
Retained earnings		13,980			23,320
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	3,120		$	0
Retained earnings		10,260			23,320

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".

1.

Option for the chart

2, 3, 4 and 5

Absorption Costing

Variable Costing

6.

Year 1 Year 2 Subtotal Total 0 $ 0 Difference in operating income 0 $ 0 Year 1 Year 2 Cost of goods sold under absorption costing Fixed manufacturing overhead as period expense under variable costing 0 $ 0 Sales revenue Variable manufacturing costs under variable costing Variable selling and administrative cost 0 $ 0 Year 1 Year 2 Cost of goods sold under absorption costing Subtotal Total 0 $ 0 Show All Items 0 $ 0 Operating income under variable costing Required 2 Operating loss under variable costing X 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. X X