Reference no: EM132540007
Compare and contrast Absorption Costing and Variable Costing. Identify the strengths and weaknesses of each approach and discuss how to mathematically reconcile the differences between the two approaches.
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
Questions
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