[The following information applies to the questions displayed below.) Huron Chalk Company manufactures sidewalk chalk which it sells online by the box at $26 per unit. Huron 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 Huron's first two years of operations is as follows: Year 1 2,700 3,100 Year 2 2,700 2,300 $15.810 $ 11,730 Sales (in units) Production (in units) Production costs: Variable manufacturing costs Fixed manufacturing overhead Selling and administrative expenses: Variable Fixed 18,910 18,910 10,800 9,800 10,800 9,800 Selected information from Huron's year-end balance sheets for its first two years of operation is as follows: HURON CHALK COMPANY Selected Balance Sheet Information Based on absorption End of Year 1 End of Year 2 costing Finished-goods inventory $ 4,480 $ 0 Retained earnings* 13,860 25,640 Based on variable costing End of Year 1 End of Year 2 Finished-goods inventory $ 2,040 $ 0 Retained earnings* 11,420 25,640 * For convenience, assume that dividends for Year 1 is $5,500 and Year 2 is $2,700. No taxes or other expenses were incurred for both the years. - Reconcile Huron'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) Use the table given below (similar to Exhibit 8-4) to answer the question. Year 1 Year 2 Subtotal $ 0 $ Total $ 0 $ Difference in operating income $ 0 $ 0 - What was Huron's 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 income statements across both years under absorption costing and under variable costing? Costs Expensed Absorption costing 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. Amount Absorption costing Variable costing . Considering the results obtained in requirements 1-5 above, which of the following statements (is) are true? (There may be more than one correct answer.) Sales revenue is different depending on the costing method used Timing is the key in distinguishing between absorption and variable costing. Since Huron'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. - Compute the amount by which the year-end balance in finished-goods inventory declined during year 2 (i.e., between December 31 of year 1 and December 31 of year 2): . Using the data from the balance sheet prepared under absorption costing. . Using the data from the balance sheet prepared under variable costing. Amount of Decline Absorption costing Variable costing -. Refer to your calculations from requirement (4). Compute the difference in the amount by which the year-end balances in finished-goods inventory declined under absorption versus variable costing. Then compare the amount of this difference with the difference in the company's reported income for year 2 under absorption versus variable costing. (Negative amounts should be indicated by a minus sign.) Amount of Difference Amount of decline in finished-goods inventory balance during year 2 Reported operating income for year 2 (absorption versus variable costing) Notice that the retained earnings balance at the end of both years 1 and 2 on the balance sheet prepared under absorption costing is greater than or equal to the corresponding retained earnings balance on the statement prepared under variable costing. Will this relationship hold true at any balance sheet date? Yes, this relationship will hold true at any balance sheet date because income reported under absorption costing will exceed income reported under variable costing in any period during which the amount of inventory increases. Yes, this relationship will hold true at any balance sheet date because income reported under variable costing will exceed income reported under absorption costing during any period that inventory increases. No, this relationship will not always hold true at any balance sheet date because of timing differences. Increases and decreases in inventory have no effect on reported income between the two costing methods