Required information

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Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $23 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 Lehighton's first two years of operation is as follows:

Year 1 Year 2

Sales (in units) 3,200 3,200

Production (in units) 3,600 2,800

Production costs:

Variable manufacturing costs $16,200 $12,600

Fixed manufacturing overhead 19,800 19,800

Selling and administrative costs:

Variable 12,800 12,800

Fixed 11,800 11,800

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 End of Year 1 End of Year 2

Finished-goods inventory $4,000 $0

Retained earnings 11,500 21,400

Based on variable costing End of Year 1 End of Year 2

Finished-goods inventory $1,800 $0

Retained earnings 9,300 21,400

Required: (PLEASE SHOW ALL WORK)

1.Reconcile Lehighton's 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 Lehighton's 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".

Required:

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

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

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

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