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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:

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Lehighton Chalk Company had no beginning or ending work-in-process inventories for either year.

  1. Prepare operating income statements for both years based on absorption costing.

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2. Prepare operating income statements for both years based on variable costing.

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3. Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2).

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Sales (in units) Production (in units) Production costs: Year 1 2, 300 2,700 Year 2 2, 300 1,900 Variable manufacturing costs Fixed manufacturing overhead $ 9,720 6,840 13,230 13,230 Selling and administrative costs: Variable Fixed 9,200 8, 200 9,200 8, 200 Selected information from Lehighton's year-end balance sheets for its first twyears 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 8,150 End of Year 1 6,190 End of Year 2 15,180 End of Year 2 15,180 $3,400 Based on variable costing Finished-goods inventory Retained earnings $1,440 Prepare operating income statements for both years based on absorption costing. LEHIGHTON CHALK COMPANY Income Statement Year 1 Year 2 Sales revenue Cost of goods sold: Beginning finished-goods inventory Cost of goods manufactured Cost of goods available for sale Ending finished-goods inventory Cost of goods sold 0 0 $ 0 Gross margin Selling and administrative expenses Operating income 0 0 Prepare operating income statements for both years based on variable costing. LEHIGHTON CHALK COMPANY Income Statement Year 1 Year 2 Cost of goods sold: Total variable costs: Fixed costs: Total fixed costs Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2) Absorption- ActualDifference inminus fixed- Change in Inventory (in units) fixed variable- costing operating income Year overhead overhead expensecd rate

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