Reference no: EM132540347
Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $27 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) 3,000 3,000
Production (in units) 3,400 2,600
Production costs:
Variable manufacturing costs. $18,360 $14,040
Fixed manufacturing overhead 22,440 22,440
Selling and administrative costs:
Variable 12,000 12,000
Fixed 11,000 11,000
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 $4,800 $0
Retained earnings 16,500 30,520
Based on variable costing End of Year 1 End of Year 2
Finished-goods inventory $2,160 $0
Retained earnings 13,860 30,520
Question 1: Prepare operating income statements for both years based on absorption costing.