Question

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 Lehighton’s first two years of operation is as follows:

	Year 1			Year 2
Sales (in units)		2,300			2,300
Production (in units)		2,700			1,900
Production costs:
Variable manufacturing costs	$	9,720		$	6,840
Fixed manufacturing overhead		13,230			13,230
Selling and administrative costs:
Variable		9,200			9,200
Fixed		8,200			8,200

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	$	3,400		$	0
Retained earnings		8,150			15,180
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	1,440		$	0
Retained earnings		6,190			15,180
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) What was Lehighton’s total operating income across both years under absorption costing and under variable costing? What was the total sales revenue across both years under absorption costing and under variable costing? What was the total of all costs expensed on the operating income statements across both years under absorption costing and under variable costing? 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. Considering the results obtained in requirements 1-5 above, select which of the following statements (is) are true by selecting an "X".

Answer 1

UNDER ABSORPTION COSTING

PARTICULARS		YEAR 1		YEAR 2
SALES	2,300 UNITS@22	$50,600	2,300 UNITS@22	$50,600
LESS:COGS		$19,550		$23,470
OPENING INVENTORY	$0		$3,400
ADD:VARIABLE COST	$9,720		$6,840
ADD:FIXED COST	$13,230		$13,230
LESS:CLOSING   INVENTORY	$3,400		$0
	$19,550		$23,470
LESS:SELLING AND ADMN. EXPENSES
VARIABLE		$9,200		$9,200
FIXED		$8,200		$8,200
OPERATING INCOME		$13,710		$9,730

UNDER VARIABLE COSTING

PARTICULARS		YEAR 1		YEAR 2
SALES	2,300 UNITS@22	$50,600	2,300 UNITS@22	$50,600
LESS:VARIABLE COSTS
MANUFACTURNING COSTS	($9720/2700 UNITS)*2300 UNITS	$8,280	400 UNITS OF YEAR1 ($9720/2700)*400 AND 1900 UNITS OF YEAR 2($6,840)	$8,280
SELLING & ADMN. COSTS		$9,200	$6,840	$9,200
CONTRIBUTION MARGIN		$33,120		$33,120
LESS:FIXED COSTS
MANUFACTURING COSTS		$13,230		$13,230
SELLING AND ADMN. EXPENSES		$8,200		$8,200
OPERATING INCOME		$11,690		$11,690

COGS(COST OF GOODS SOLD) UNDER VARIABLE COST WILL INCLUDE ONLY VARIABLE MANUFACTURING OVERHEADS

PARTICULARS		YEAR 1		YEAR 2
VARIABLE MANUFACTURING COSTS		$8,280		$8,280
COGS		$8,280		$8,280
MANUFACTURNING COSTS	($9720/2700 UNITS)*2300 UNITS	$8,280	400 UNITS OF YEAR1 ($9720/2700)*400 AND 1900 UNITS OF YEAR 2($6,840)	$8,280
FIXED COSTS UNDER ABSORPTION COSTING
FIXED MANUFACTURING COSTS		$13,230		$13,230
NO. OF UNITS		2,700		1,900
PER UNIT FIXED MANUFACTURING COST		$4.9		$6.96
UNITS SOLD		2,300		2,300
FIXED COST EXPENSED
FIXED COST CARIED FROM OEPNING INVENTORY		0		$1,960
CURRENT YEAR FIXED COST		$13,230		$13,230
FIXED COST CARRIED TO ENDING INVENTORY		$1,960
FIXED COST EXPENSED	(2300 UNITS)*$4.9	$11,270		$15,190