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 $22 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:

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)

What was Lehighton’s total operating income across both years under absorption costing and under variable costing?

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

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

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".

Year 1 Year 2 Sales (in units) 2,300 2,300 Production (in units) 2,700 1,900 Production costs: Variable manufacturing costs $ 9,720 $ 6,840 Fixed manufacturing overhead 13,230 13,230 Selling and administrative costs: Variable 9,200 9,200 Fixed 8,200 8,200

Explanation / Answer

UNDER ABSORPTION COSTING

LESS:CLOSING

  INVENTORY

UNDER VARIABLE COSTING

CONTRIBUTION MARGIN

COGS(COST OF GOODS SOLD) UNDER VARIABLE COST WILL INCLUDE ONLY VARIABLE MANUFACTURING OVERHEADS

FIXED MANUFACTURING COSTS

PARTICULARS YEAR 1 YEAR 2 SALES 2,300 UNITS@22 $50,600 2,300 UNITS@22 $50,600 LESS:COGS $19,550 $23,470 OPENING INVENTORY $0 $3,400 ADD:VARIABLE COST $9,720 $6,840 ADD:FIXED COST $13,230 $13,230

LESS:CLOSING

  INVENTORY

$3,400 $0 $19,550 $23,470 LESS:SELLING AND ADMN. EXPENSES VARIABLE $9,200 $9,200 FIXED $8,200 $8,200 OPERATING INCOME $13,710 $9,730

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