Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by th

Question

Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $25 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:

Selected information from Lehighton’s year-end balance sheets for its first two years of operation is as follows:

Required:

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

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

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

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

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

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

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

Year 1 Year 2 Sales (in units) 2,500 2,500 Production (in units) 3,100 1,900 Production costs: Variable manufacturing costs $ 15,190 $ 9,310 Fixed manufacturing overhead 18,290 18,290 Selling and administrative costs: Variable 10,000 10,000 Fixed 9,000 9,000

Explanation / Answer

a) LEHIGHTON CHALK COMPANY ABSORPTION-COSTING INCOME STATEMENT FOR THE YEAR ENDED Year 1 Year 2 Sales Revenue $62,500.00 $62,500.00 Less: Cost of Goods Sold: Beginning finished-goods inventory $0.00 $6,480.00 Cost of goods manufactured = Variable Manufacturing Cost + Fixed Manufacturing Cost $33,480.00 $27,600.00 Cost of goods available for sale $33,480.00 $34,080.00 Less: Ending finished-goods inventory = $6,480.00 $0.00 Cost of Goods Sold $27,000.00 $34,080.00 Gross Margin $35,500.00 $28,420.00 Less: Selling and Administrative Expenses $19,000.00 $19,000.00 Operating Income $16,500.00 $9,420.00 2) LEHIGHTON CHALK COMPANY VARIABLE-COSTING INCOME STATEMENT FOR THE YEAR ENDED Year 1 Year 2 Sales Revenue $62,500.00 $62,500.00 Less: Cost of Goods Sold Beginning finished-goods inventory $0.00 $2,940.00 Cost of goods manufactured $15,190.00 $9,310.00 Cost of goods available for sale $15,190.00 $12,250.00 Less: Ending finished-goods inventory $2,940.00 0 Cost of Goods Sold $12,250.00 $12,250.00 Variable Selling and Administrative Costs $10,000.00 $10,000.00 Total Variable Costs $22,250.00 $22,250.00 Contribution Margin $40,250.00 $40,250.00 Less: Fixed Manufacturing Overhead $18,290.00 $18,290.00 Fixed Selling and Adminstrative Costs $9,000.00 $9,000.00 Total Fixed Costs $27,290.00 $27,290.00 Operating Income $12,960.00 $12,960.00 3. Reconciliation of reported operating income under absorption and variable costing. Difference in Change in Actual Fixed Difference In Fixed Absorption and Year inventory (units) Overhead Rate Overhead Expensed Variable Income 1 3100 2500 5.9 3540 $3,540.00 2 1900 2500 5.9 -3540 -$3,540.00 Fixed overhead Rate = (18290 /3100) 5.9

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