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

Please find below table useful to compute desired results: -

A DE per unit F Variable manufacturing cost per unit 1 Selling Price =B6/B4 2 Calculation of operating income Absorption costing Year 1 Year 2 =B3 =C3 =F6*B1 =G6*B1 3 Sales 2700 2700 4 Production 3100 2300 5 Production Costs: 6 Variable manufacturing costs 11730 7 Fixed manufacturing overhead 18910 18910 8 Selling and Administrative 9 Variable 10800 10800 10 Fixed 9800 9800 11 12 Selected Balance Sheet Information 13 Based on absorption Costing End of year 1 End of Year 2 14 Finished goods inventory 4480 15 Retained Earnings 13860 25640 16 17 Based on Variable costing End of year 1 End of Year 2 18 Finished goods inventory 2040 19 Retained Earnings 11420 25640 20 Units sales Sales Less: COGS Variable Manufacturing costs Fixed Manufacturing Costs Total COGS Gross Margin Less: selling & Admin. Expenses Variable Fixed Total Operating expenses Operating Income =F6*J1 =B7/B4*F6 =F9+F10 =F7-F11 =G6*J1 =B7-F10+C7 =G9+G10 =G7-G11 Variable Costing Year 1 Year 2 Unit Sales =B3 =C3 Sales =16*B1 =J6*B1 Less: Variable Costs Manufacturing Costs =J1*16 =J1*J6 Selling & Admin. Expenses =B9 =C9 Total Variable Cost =19+I10 =19+J10 Contribution Margin =17-111 =J7-J11 Less: Fixed Costs Manufacturing Costs =B7 =C7 Selling & Admin. Expenses =B10 -C10 Total Fixed Costs =114+115 =J14+J15 Operating Income =112-116 =J12-J16 -B9 =B10 =F14+F15 =F12-F16 =C9 =C10 =G14+G15 =G12-G16 Year Change in Inventory (in Units) Actual Fixed-overhead rate Difference in fixed overhead Absorption-minus variable- expensed costing operating income |=B4 =B22-B3 * =B7/B4 =C22*E22 =C23*E23 =F17-117 =G17-J17 =B23-C3 =E22 Activate Windows

End results would be as follows:-

D F G Variable manufacturing cost per unit 5.10 2,700 А B C 1 Selling Price | 26 per unit 2 3 Sales 2,700 4 Production 3,100 2,300 5 Production Costs: 6 Variable manufacturing costs 15,810 11,730 7 Fixed manufacturing overhead 18,910 18,910 8 Selling and Administrative 9 Variable 10,800 10,800 10 Fixed 9,800 9,800 11 Selected Balance Sheet Information 13 Based on absorption Costing End of year 1 | End of Year 2 14 Finished goods inventory 4,480 15 Retained Earnings 13,860 25,640 16 End of year 1 End of Year 2 18 Finished goods inventory 2,040 19 Retained Earnings 11,420 25,640 20 Calculation of operating income Absorption costing Variable Costing Year 1 Year 2 Year 1 Year 2 Units sales 2,700 2,700 Unit Sales 2,700 2,700 Sales 70,200 70,200 Sales 70,200 70,200 Less: COGS Less: Variable Costs Variable Manufacturing costs 13,770 13,770 Manufacturing Costs 13,770 13,770 Fixed Manufacturing Costs 16,470 21,350 Selling & Admin. Expenses 10,800 | 10,800 Total COGS 30,240 35,120 Total Variable Cost 24,570 24,570 Gross Margin 39,960 35,080 Contribution Margin 45,630 45,630 Less: selling & Admin. Expenses Less: Fixed Costs Variable 10,800 10.800 Manufacturing Costs 18,910 | 18,910 Fixed 9,800 9.800 Selling & Admin. Expenses 9.800 9,800 Total Operating expenses 20,600 20,600 Total Fixed Costs 28,710 28.710 Operating Income 19,360 14,480 Operating Income 16,920 16,920 Year Change in Inventory (in Units) Actual Fixed-overhead rate Difference in Absorption- minus variable- fixed overhead costing operating expensed income 1 3 ,100 2,300 400 * (400) * 6.10 6.10 2,440 (2.440 2,440 (2,440) Activa