Lehighton Chalk Company manufactures sidewalk chalk

McGraw-Hill Module 6 Problems Question 1) 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 work­in­
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
Sales (in units)
Production (in units)
Production costs:
Variable manufacturing costs
Fixed manufacturing overhead Year 2 2,900
3,400
$18,020 $
21,420 2,900
2,400
12,72
0
21,42
0 Selling and administrative costs:
Variable 11,600 Fixed 10,600 11,60
0
10,60
0 Selected information from Lehighton’s year­end 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
Finished-goods inventory
$ 5,800
16,96
Retained earnings
0
Based on variable costing
Finished-goods inventory
Retained earnings
1. End of Year 1
$ 2,650
13,81
0 End of Year 2
$
0
30,42
0
End of Year 2
$
0
30,42
0 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
1 Year 2 McGraw-Hill Module 6 Problems
2
Subtotal
3
Total
$
$
4
5
Difference in Operating income
$
$
** Each numbered row, 1, 2, 3, 4, 5 have multiple choices in terms for your selection.
**
Options are:
1Cost of goods sold under absorption costing
Fixed manufacturing overhead under variable costing
Sales revenue
Veritable manufacturing cost under variable costing
Variable selling administrative cost.
2 & 3 (same options)
Cost of goods sold under absorption costing
Fixed manufacturing overhead as period expense under variable costing
Sales revenue
Veritable manufacturing cost under variable costing
Variable selling administrative cost.
4Operating income under variable costing
Operating loss under variable costing.
5Add: operating income under absorption costing
Less: operating income under absorption costing.
2. What was Lehighton’s total operating income across both years under
absorption costing and under variable costing?
Absorption costing =
Variable costing = 3. What was the total sales revenue across both years under absorption costing
and under variable costing?
Absorption costing =
Variable costing = 4. What was the total of all costs expensed on the operating income statements
across both years under absorption costing and under variable costing?
Absorption costing =
Variable 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
costing and (b) under variable costing.
Absorption costing =
Variable costing = McGraw-Hill Module 6 Problems 6. Considering the results obtained in requirements 1-5 above, select which of
the following statements (is) are true by selecting an "X".
a. Sales revenue is different depending on the costing method used. _____
b. Timing is the key in distinguishing between absorption and variable costing. ____
c. Since Lehighton’s combined operating income, across the two-year period, is the same under both
absorption and variable costing, then the operating income must be the same with in each year under both
methods. ____
d. The difference between absorption and variable costing is caused by the timing with which expenses are
recognized. ____ Question 2) Lehighton Chalk Company had no beginning or ending work­in­process inventories for either year. Using the same data:
Year
1
Sales (in units)
Production (in units)
Production costs:
Variable manufacturing costs
Fixed manufacturing overhead Year 2 2,900
3,400
$18,020 $
21,420 2,900
2,400
12,72
0
21,42
0 Selling and administrative costs:
Variable 11,600 Fixed 10,600 11,60
0
10,60
0 Selected information from Lehighton’s year­end 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
Finished-goods inventory
$ 5,800
16,96
Retained earnings
0
Based on variable costing
Finished-goods inventory
Retained earnings End of Year 1
$ 2,650
13,81
0 End of Year 2
$
0
30,42
0
End of Year 2
$
0
30,42
0 1. Prepare operating income statements for both years based on absorption costing. McGraw-Hill Module 6 Problems
YEAR 1 YEAR 2 $ $ $ $ $ $ 1
Cost of Goods Sold 2
3
4
5
6
7
8
9 ** each numbered row, 1, 2, 3, 4, 5, 6, 7, 8, 9 have multiple choices in terms for your
selection.**
Options are:
1Cost of goods available for sale
Cost of goods manufactured
Sales revenue
Selling and administrative expenses
Unearned revenue
2, 3, 4, 5, 6 (same options)
Beginning finished goods inventory
Cost of goods available for sale
Cost of goods manufactured
Cost of goods sold
Ending finished goods inventory
Variable selling and administrative cost
7Contribution margin
Contribution loss
Gross margin
Gross loss
8Cost of goods available for sale
Cost of goods manufactured
Sales revenue
Selling and administrative expenses
Unearned revenue
9Operating income
Operating loss
2. Prepare operating income statements for both years based on variable costing. Year 1
1
Cost of Goods Sold 2 Year 2 McGraw-Hill Module 6 Problems
3
4
5
6
7
Total variable cost 8 $ $ $
$ $
$ $
$ $
$ Fixed cost 9
10
Total fixed cost 11 ** Each numbered row, 1 through 11, have multiple choices in terms for your
selection. ** Options are:
1Cost of goods available for sale
Cost of goods manufactured
Sales revenue
Selling and administrative expenses
Unearned revenue
2, 3, 4, 5, 6, 7 (same options)
Beginning finished goods inventory
Cost of goods available for sale
Cost of goods manufactured
Cost of goods sold
Ending finished goods inventory
Variable selling and administrative cost
8Contribution margin
Contribution loss
Gross margin
Gross loss
9 & 10 (same options)
Cost of goods available for sale
Cost of goods manufactured
Fixed manufacturing cost
Fixed selling and administrative expenses
Unearned revenue
11Operating income
Operating loss
3. Prepare a numerical reconciliation of the difference in income reported under the
two costing methods used in requirements (1) and (2). Year Change in
inventory
(units) Actual fixedoverhead rate Difference in
fixed
overhead Absorption minus
variable-costing
operating income McGraw-Hill Module 6 Problems
expensed
1
Up or Down X
2
Up or Down X
Underline the answer for the change in inventory.