Lehighton Chalk Company manufactures blackboard chalk for educational uses. The company’s product is sold by the box at $50 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-inprocess 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) | 2,500 | 2,500 |
Production (in units) | 3,000 | 2,000 |
Production costs: | ||
Variable manufacturing costs | $21,000 | $14,000 |
Fixed manufacturing over head | 42,000 | 42,000 |
Selling and administrative costs: | ||
Variable | 25,000 | 25,000 |
Fixed | 20,000 | 20,000 |
Required: Lehighton Chalk Company had no beginning or ending work-in-process inventories for either year.
1.Prepare operating income statements for both years based on absorption costing.
2.Prepare operating income statements for both years based on variable costing.
3.Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2).
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