Question

[The following information applies to the questions displayed below.) Huron Chalk Company manufactures sidewalk chalk which it sells online by the box at $26 per unit. Huron 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 Huron's first two years of operations is as follows: Year 1 2,700 3,100 Year 2 2,700 2,300 $15.810 $ 11,730 Sales (in units) Production (in units) Production costs: Variable manufacturing costs Fixed manufacturing overhead Selling and administrative expenses: Variable Fixed 18,910 18,910 10,800 9,800 10,800 9,800 Selected information from Huron's year-end balance sheets for its first two years of operation is as follows: HURON CHALK COMPANY Selected Balance Sheet Information Based on absorption End of Year 1 End of Year 2 costing Finished-goods inventory $ 4,480 $ 0 Retained earnings* 13,860 25,640 Based on variable costing End of Year 1 End of Year 2 Finished-goods inventory $ 2,040 $ 0 Retained earnings* 11,420 25,640 * For convenience, assume that dividends for Year 1 is $5,500 and Year 2 is $2,700. No taxes or other expenses were incurred for both the years.

Answer 1

Prepare the reconciliation statement as follows

Particulars	Year 1	Year 2
Cost of goods sold - absorption costing	$30,240	$35,120
Deduct: Variable manufacturing costs - Variable Costing	$13,770	$13,770
Subtotal	$16,470	$21,350
Deduct: Fixed Manufacturing overhead as period expense under variable costing	$18,910	$18,910
Total	($2,440)	$2,440
Operating income under variable costing	$16,920	$16,920
Less: Operating income under absorption costing	$19,360	$14,480
Difference in operating income	($2,440)	$2,440

Notes:

Compute cost of goods sold under absorption costing in year one as follows

Particulars	Amount
Variable manufacturing costs	$15,810
Fixed manufacturing overhead	$18,910
Total manufacturing costs	$34,720
Deduct: Ending finished goods inventory under absorption costing	($4,480)
Cost of goods sold under absorption costing	$30,240

Compute cost of goods sold under absorption costing in year two as follows

Particulars	Amount
Variable manufacturing costs	$11,730
Fixed manufacturing overhead	$18,910
Total manufacturing costs	$30,640
Add: Beginning finished goods inventory under absorption costing	$4,480
Cost of goods sold under absorption costing	$35,120

Compute cost of goods sold under variable costing in year one as follows

Particulars	Amount
Variable manufacturing costs	$15,810
Deduct: Ending finished goods inventory under variable costing	($2,040)
Cost of goods sold under variable costing	$13,770

Compute cost of goods sold under variable costing in year two as follows

Particulars	Amount
Variable manufacturing costs	$11,730
Add: Beginning finished goods inventory under variable costing	$2,040
Cost of goods sold under variable costing	$13,770

Compute operating income under absorption costing for year one as follows

Particulars	Amount
Retained earnings	$13,860
Add: Dividends paid	$5,500
Operating income under absorption costing	$19,360

Compute operating income under absorption costing for year two as follows

Particulars	Amount
Retained earnings - Ending balance	$25,640
Deduct: Beginning balance	($13,860)
Add: Dividends paid	$2,700
Operating income under absorption costing	$14,480

Compute operating income under variable costing for year one as follows

Particulars	Amount
Retained earnings - Ending balance	$11,420
Add: Dividends paid	$5,500
Operating income under variable costing	$16,920

Compute operating income under variable costing for year two as follows

Particulars	Amount
Retained earnings - Ending balance	$25,640
Deduct: Retained earnings - Beginning balance	($11,420)
Add: Dividends paid	$2,700
Operating income under variable costing	$16,920