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Discussion Module 4

For this discussion, compare and contrast Absorption Costing and Variable Costing. Identify the strengths and weaknesses of each approach and discuss how to mathematically reconcile the differences between the two approaches.

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 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 Lehightons first two years of operation is as follows:

Year 1 Year 2

Sales (in units) 3,000 3,000

Production (in units) 3,400 2,600

Production costs:

Variable manufacturing costs. $18,360 $14,040

Fixed manufacturing overhead 22,440 22,440

Selling and administrative costs:

Variable 12,000 12,000

Fixed 11,000 11,000

Selected information from Lehightons 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 $4,800 $0

Retained earnings 16,500 30,520

Based on variable costing End of Year 1 End of Year 2

Finished-goods inventory $2,160 $0

Retained earnings 13,860 30,520

Questions

Lehighton Chalk Company had no beginning or ending work-in-process inventories for either year.

1. Reconcile Lehightons 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)

2. What was Lehightons total operating income across both years under absorption costing and under variable costing?
3. What was the total sales revenue across both years under absorption costing and under 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?
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.
6. Considering the results obtained in requirements 1-5 above, select which of the following statements (is) are true by selecting an "X".

Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required 5 Required 6 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) Show less Year 1 Year 2 Cost of goods sold under absorption costing Variable manufacturing costs under variable costing Subtotal Fixed manufacturing overhead as period expense under variable costing Total $ 0 $ 0 Operating income under variable costing Add: Operating income under absorption costing Difference in operating income $ $ O 0 Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required 5 Required 6 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) Show less Year 1 Year 2 Cost of goods sold under absorption costing Variable manufacturing costs under variable costing Subtotal Fixed manufacturing overhead as period expense under variable costing Total $ 0 $ 0 Operating income under variable costing Add: Operating income under absorption costing Difference in operating income $ $ O 0

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