Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $24 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:

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".

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 absorptionand variable costing, then the operating income must be the same within each year under both methods:

The difference between absorption and variable costing is caused by the timing with which expenses are recognized:

Sales (in units) Production (in units) Production costs Year 1 2,400 2,800 Year 2 2,400 2,000 Variable manufacturing costs Fixed manufacturing overhead $13,440 9,60e 16,24016, 240 Selling and administrative costs: Variable Fixed 9,600 8,600 9,600 8,600 Selected information from Lehighton's 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 Finished-goods inventory Retained earnings End of Year 1 $4,240 8,460 End of Year 2 15,080 End of Year 2 15,080 Based on variable costing Finished-goods inventory Retained earnings End of Year 1 $ 1,920 6,140