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Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $27 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)		2,900			2,900
Production (in units)		3,400			2,400
Production costs:
Variable manufacturing costs	$	18,020		$	12,720
Fixed manufacturing overhead		21,420			21,420
Selling and administrative costs:
Variable		11,600			11,600
Fixed		10,600			10,600

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	$	5,800		$	0
Retained earnings		16,960			30,420
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	2,650		$	0
Retained earnings		13,810			30,420

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.

Please bold the answer to each question.

Year 1 Year 2 Subtotal Total Difference in operating income 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