Required information The following information applies to the questions displaye

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Required information The following information applies to the questions displayed below.] Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $24 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: Sales (in units) Production (in units) Production costs: Year 1 Year 2 2,800 2, 800 3, 300 2, 300 Variable manufacturing costs Fixed manufacturing overhead $13,530 $ 9,430 16, 830 16, 830 Selling and administrative costs: Variable Fixed 11,200 11,200 10,200 10,200 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 Finished-goods inventory Retained earnings End of Year $ 4,600 14,540 End of Year 2 26,780 Based on variable costing Finished-goods inventory Retained earnings End of Year $ 2,050 11, 990 End of Year 2 26,780 Required: Lehighton Chalk Company had no beginning or ending work-in-process inventories for either year. 1. 2. 3. Prepare operating income statements for both years based on absorption costing. 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).

Explanation / Answer

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Absorption Costing Income Statement Year 1 Year 2 Sales Revenue (2800*24)(2800*24) $ 67,200 $ 67,200 Less: Cost of Goods Sold: Beginning finished-goods inventory $           -   $    4,600 Cost of goods manufactured (13530+16830) (9430+16830) $ 30,360 $ 26,260 Cost of goods available for sale $ 30,360 $ 30,860 Ending finished-goods inventory $    4,600 $           -   Cost of goods sold $ 25,760 $ 30,860 Gross Margin $ 41,440 $ 36,340 Selling and administrative expenses (11200+10200) $ 21,400 $ 21,400 Operating income $ 20,040 $ 14,940

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