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)	2900	2900
Production (in units)	3300	2500
Production costs:
Variable manufacturing costs	$13860	$10500
Fixed manufacturing costs	17160	17160
Selling and administrative costs:
Variable	11600	11600
Fixed	10600	10600

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	$3760	$0
Retained earnings	17540	33720
Based on variable costing	End of Year 1	End of Year 2
Finished-goods inventory	$1680	$0
Retained earnings	$15460	33720

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".

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
Sales Revenue
Cost of goods sold under absorption costing
Subtotal
Fixed manufacturing overhead as period expense under variable costing
Total
Operating loss under variable costing
Add: Operating income under absorption costing
Difference in operating income

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

	Total Operating Income
Absorption costing
Variable costing

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

	Total Sales Revenue
Absorption costing
Variable costing

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

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

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 absorption and 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.