Reference no: EM132562066

Snow White Chalk Company manufactures sidewalk chalk which it sells online by the box at Rs.25 per unit.

Snow White 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 Snow White's first two years of operations is as follows:

                                                     Year 1                        Year 2

Sales (in units)                                    2,500                      2,500

Production (in units)                                 3,000                  2,000

Production costs:

Variable manufacturing costs                           Rs.10,500          Rs. 7,000

Fixed manufacturing overhead                        Rs. 21,000            Rs. 21,000

Selling and administrative expenses:

Variable                                                         Rs. 12,500             Rs. 12,500

Fixed                                                              Rs. 10,000            Rs. 10,000

Required: Snow White Chalk Company had no beginning or ending work-in-process inventories for either year.

Question 1. Prepare operating income statements for both years based on absorption costing.

Question 2. Prepare operating income statements for both years based on variable costing.

Question 3. Prepare numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2).