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 Lehighton's first two years of operation is as follows:

Year 1Year 2

Sales (in units)3,0003,000

Production (in units)3,4002,600

Production costs:

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

Fixed manufacturing overhead22,44022,440

Selling and administrative costs:

Variable12,00012,000

Fixed11,00011,000

Selected information from Lehighton's year-end balance sheets for its first two years of operation is as follows:

LEHIGHTON CHALK COMPANY

Selected Balance Sheet Information

Based on absorption costingEnd of Year 1End of Year 2

Finished-goods inventory$4,800$0

Retained earnings16,50030,520

Based on variable costingEnd of Year 1End of Year 2

Finished-goods inventory$2,160$0

Retained earnings13,86030,520

Questions

1. 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)

year 1 year 2

Subtotal

total

difference in operating income

1. What was Lehighton's total operating income across both years under absorption costing and under variable costing?
2. What was the total sales revenue across both years under absorption costing and under variable costing?
3. What was the total of all costs expensed on the operating income statements across both years under absorption costing and under variable costing?
4. 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.
5. Considering the results obtained in requirements 1-5 above, select which of the following statements (is) are true by selecting an "X".