Explanation At the end of year 1 under absorption costing 2440 of fixed

# Explanation at the end of year 1 under absorption

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calculation, not the year 2 rate. Explanation: At the end of year 1, under absorption costing, \$2,440 of fixed overhead remained stored in finished-goods inventory as a product cost (year 1 fixed-overhead rate of \$6.10 per unit × 400 units = \$2,440). However, in year 1, under variable costing, that fixed overhead was expensed as a period cost. In year 2, under absorption costing, that same \$2,440 of fixed overhead was expensed when the units were sold. However, under variable costing, that \$2,440 of fixed overhead cost had already been expensed in year 1 as a period cost. Prepare operating income statements for both years based on absorption costing . LEHIGHTON CHALK COMPANY Income Statement Year 1 Year 2 Sales revenue \$70,200 \$70,200 Cost of goods sold: Beginning finished-goods inventory \$4,480 Cost of goods manufactured 34,720 30,640 Cost of goods available for sale \$34,720 \$35,120 Ending finished-goods inventory 4,480 Cost of goods sold \$30,240 \$35,120 Gross margin \$39,960 \$35,080 Selling and administrative expenses 20,600 20,600 Operating income \$19,360 \$14,480 Prepare operating income statements for both years based on variable costing. LEHIGHTON CHALK COMPANY Income Statement
Year 1 Year 2 Sales revenue \$70,200 \$70,200 Cost of goods sold: Beginning finished-goods inventory \$2,040 Cost of goods manufactured 15,810 11,730 Cost of goods available for sale \$15,810 \$13,770 Ending finished-goods inventory 2,040 Cost of goods sold \$13,770 \$13,770 Variable selling and administrative costs 10,800 10,800 Total variable costs: \$24,570 \$24,570 Contribution margin \$45,630 \$45,630 Fixed costs: Fixed manufacturing costs \$18,910 \$18,910 Fixed selling and administrative expenses 9,800 9,800 Total fixed costs \$28,710 \$28,710 Operating income \$16,920 \$16,920 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 (in units) Actual fixed- overhead rate Difference in fixed overhead expensed Absorption- minus variable- costing operating income 1 400 increase × \$6.10 \$2,440 2,440 2 400 decrease × \$6.10 \$(2,440) (2,440)

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• Spring '14
• Zeeshan
• Revenue, Lehighton Chalk Company, actual costs of direct material, Lehighton’s year-end balance sheets

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