Reference no: EM132540002

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

Question 1: Reconcile Lehighton's operating income reported under absorption and variable costing, during each year, by comparing the following two amounts on each income statement:

Cost of goods sold
Fixed cost (expensed as a period expense)

year 1 year 2

Subtotal

total

difference in operating income

Question 2: What was Lehighton's total operating income across both years under absorption costing and under variable costing?

Question 3: What was the total sales revenue across both years under absorption costing and under variable costing?

Question 4: What was the total of all costs expensed on the operating income statements across both years under absorption costing and under variable costing?

Question 5: Subtract the total costs expensed across both years [requirement (4)] from the total sales revenue across both years [requirement (3)]: (a) under absorption costing and (b) under variable costing.
Considering the results obtained in requirements 1-5 above, select which of the following statements (is) are true by selecting an "X".