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
Lehighton Chalk Company had no beginning or ending work-in-process inventories for either year. 1. Prepare operating income statements for both years based on absorption costing. 2. Prepare operating income statements for both years based on variable costing. Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2)

Answer 1