Use the following information to answer questions 42-44 The following information applies to the questions displayed below.] Huron Chalk Company manufactures sidewalk chalk which it sells online by the box at $24 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: Sales (in units) Production (in units) Production costs: Year 1 Year 2 2,400 2,400 2,800 2,000 Variable manufacturing $13,440 $9,600 costs overhead expenses: Fixed manufacturing 16,240 16,240 Selling and administrative Variable Fixed 9,600 9,600 8,600 8,600 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 costing End of Year 1 End of Year 2 Finished-goods inventory $4,240 Retained earnings* 8,460 15,080 Based on variable costing End of Year 1 End of Year 2 Finished-goods inventory $1,920$ 0 Retained earnings* 6,140 15,080 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 Case 8-44 Absorption and Variable Costing; Effect on the Balance Sheet; Continuation of Preceding Case (LO 8-1, 8-4) Required 4. 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 5. 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) 6. 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 Use the following information to answer questions 42-44 The following information applies to the questions displayed below.] Huron Chalk Company manufactures sidewalk chalk which it sells online by the box at $24 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: Sales (in units) Production (in units) Production costs: Year 1 Year 2 2,400 2,400 2,800 2,000 Variable manufacturing $13,440 $9,600 costs overhead expenses: Fixed manufacturing 16,240 16,240 Selling and administrative Variable Fixed 9,600 9,600 8,600 8,600 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 costing End of Year 1 End of Year 2 Finished-goods inventory $4,240 Retained earnings* 8,460 15,080 Based on variable costing End of Year 1 End of Year 2 Finished-goods inventory $1,920$ 0 Retained earnings* 6,140 15,080 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 Case 8-44 Absorption and Variable Costing; Effect on the Balance Sheet; Continuation of Preceding Case (LO 8-1, 8-4) Required 4. 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 5. 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) 6. 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