Reference no: EM132511148

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:

                                                             Year 1                        Year 2

Sales (in units)                               2,300                        2,300

Production (in units)                          2,800                      1,800

Production costs:

Variable manufacturing costs.                 $13,160                 $8,460

Fixed manufacturing overhead                 15,960                     15,960

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                              $5,200                           $0

Retained earnings                                        8,380                           13,860

Based on variable costing.                      End of Year 1.               End of Year 2

Finished-goods inventory.                          $2,350                                $0

Retained earnings                                   5,530                                13,860

1. Lehighton Chalk Company had no beginning or ending work-in-process inventories for either year.
2. Lehighton 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).