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

Case 8-43 Analysis of Differences in Absorption-Costing and Variable-Costing Income Statements; Continuation of Preceding Case (LO 8-1, 8-6)

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, evaluate the following statements.

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)

	Year 1	Year 2
Subtotal
Total
Difference in operating income

Required 2 - What was Lehightons total operating income across both years under absorption costing and under variable costing?

	Total Operating Income
Absorption costing
Variable costing

Required 3 - What was the total sales revenue across both years under absorption costing and under variable costing?

	Total Sales Revenue
Absorption costing
Variable costing

Required 4- What was the total of all costs expensed on the operating income statements across both years under absorption costing and under variable costing?

	Costs Expensed
Absorption costing
Variable costing

Required 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.

	Amount
Absorption costing
Variable costing