question archive Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $28 per unit
Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $28 per unit
Subject:FinancePrice:2.87 Bought7
Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $28 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) | 3,100 | 3,100 | |||||
| Production (in units) | 3,700 | 2,500 | |||||
| Production costs: | |||||||
| Variable manufacturing costs | $ | 20,350 | $ | 13,750 | |||
| Fixed manufacturing overhead | 24,790 | 24,790 | |||||
| Selling and administrative costs: | |||||||
| Variable | 12,400 | 12,400 | |||||
| Fixed | 11,400 | 11,400 | |||||
|
|
|||||||
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 | $ | 7,320 | $ | 0 | ||
| Retained earnings | 19,680 | 34,120 | ||||
| Based on variable costing | End of Year 1 | End of Year 2 | ||||
| Finished-goods inventory | $ | 3,300 | $ | 0 | ||
| Retained earnings | 15,660 | 34,120 | ||||
|
|
||||||
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).
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
Solution:
1)Prepare operating income statement under absorption costing:
| Year 1 | Year 2 | |
| Sales revenue | $86,800 (3,100*28) | $86,800 (3,100*28) |
| Variable manufacturing costs | $20,350 | $13.750 |
| Fixed manufacturing overhead | $24,790 | $24,790 |
| $45,140 | $38,540 | |
| Add:Opening stock of finished goods | 0 | $7,320 |
| Less: Closing stock of finished goods | $7,320 | 0 |
| Cost of goods sold | $37,820 | $45,860 |
| Selling and administrative costs: | ||
| Variable | $12,400 | $12,400 |
| Fixed | $11,400 | $11,400 |
| Total cost | $61,620 | $69,660 |
| Net profit | $25,180 | $17,140 |
2)Prepare operating income statement under variable costing:
| Year 1 | Year 2 | |
| Sales revenue | $86,800 (3,100*28) | $86,800 (3,100*28) |
| Cost of goods sold | ||
| Variable manufacturing costs | $17,050 (3,100*5.5) | $17,050 (3,100*5.5) |
| variable selling and administrative cost | $12,400 | $12,400 |
| Total variable cost | $29,450 | $29,450 |
| Fixed manufacturing overhead | $24,790 | $24,790 |
| Fixed selling and administrative cost | $11,400 | $11,400 |
| Total fixed cost | $36,190 | $36,190 |
| Total cost | $65,640 | $65,640 |
| Net profit | $21,160 | $21,160 |
Note :
Variable manufacturing cost per unit = $20,350 / $3,700 = $5.5 per unit
3)Reconciliation of income between Absorption & variable costing
| Year | change in inventory (in units) | Actual fixed overhead rate | Difference in fixed overhead expense | Absorption minus variable costing operating income | |
| 1 | 600 | * | $6.70 | $4,020 | $4,020 |
| 2 | -600 | * | $6.70 | ($4,020) | ($4,020) |
