Problem
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 Leighton's first two years of operations is as follows:
| |
YEAR 1
|
YEAR 2
|
|
Sale (in units)
|
2,600
|
2,600
|
|
Production (in units)
|
3,100
|
2,100
|
|
Production Costs:
|
|
|
|
Variable manufacturing costs
|
$15,500
|
$10,500
|
|
Fixed manufacturing overhead
|
18,600
|
18,600
|
|
Selling and administrative costs:
|
|
|
|
Variable
|
10,400
|
10,400
|
|
Fixed
|
9,400
|
9,400
|
Selected information from Leighton's year-end balance sheets for its first two years of operations is as follows:
|
Based on absorption costing
|
End of Year 1
|
End of Year 2
|
|
Finished-goods inventory
|
$5,500
|
$0
|
|
Retained earnings
|
11,000
|
19,000
|
|
Based on variable costing
|
End of Year 1
|
End of Year 2
|
|
Finished goods inventory
|
$2,500
|
$0
|
|
Retained earnings
|
8,100
|
19,000
|
1. Reconcile Lehigton'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 costs (expensed as a period expense)
2. What was Lehighton's total operating income across both years under absorption costing and under variable costing?
3. What was the total sales revenue across both years under absorption costing and under variable costing?
4. What was the total of all costs expensed on the operating income statements across both years under absorption costing and undervariable costing?
5. Subtract the total costs expensed across both years [requirement (4)] from the total sales revenue across both years [requirement (3)]; (a) under absorption costs and (b) under variable costing?
6. Considering the results obtained in requirements 1-5 above, select which of the following statements (is) are true by selecting "X"
Sales revenue is different depending on the costing method used
Timing is the key in distinguishing between absorption and variable costing
Since Lehighton's combined operating income across the two-year period, is the same under both absorption and variable costing, then the operationg income must be the same within each year under both methods
The difference between absorption and variable costing is caused by the timeing with which expemses are recongnized.
** Show me how the answer was figured out so I can understand it.