Question: Refer to the information given in Case
Refer to the information given in Case 2 for Huron Chalk Company. Selected information from Huron’s year-end balance sheets for its first two years of operation is as follows:
Information in case 2:
Huron Chalk Company manufactures sidewalk chalk which it sells online by the box at $25 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:
Required:
1. Why is the year 1 ending balance in finished-goods inventory higher if absorption costing is used than if variable costing is used?
2. Why is the year 2 ending balance in finished-goods inventory the same under absorption and variable costing?
3. Notice that the ending balance of finished-goods inventory under absorption costing is greater than or equal to the ending finished-goods inventory balance under variable costing for both years 1 and 2. Will this relationship always hold true at any balance sheet date? Explain.
4. Compute the amount by which the year-end balance in finished-goods inventory declined during year 2 (i.e., between December 31 of year 1 and December 31 of year 2):
• Using the data from the balance sheet prepared under absorption costing.
• Using the data from the balance sheet prepared under variable costing.
5. Refer to your calculations from requirement (4). Compute the difference in the amount by which the year-end balances in finished-goods inventory declined under absorption versus variable costing. Then compare the amount of this difference with the difference in the company’s reported operating income for year 2 under absorption versus variable costing. (Refer to the operating income statements prepared in Case 2.)
6. Notice that the retained earnings balance at the end of both years 1 and 2 on the balance sheet prepared under absorption costing is greater than or equal to the corresponding retained earnings balance on the statement prepared under variable costing. Will this relationship hold true at any balance sheet date? Explain.
Transcribed Image Text:
HURON CHALK COMPANY Selected Balance Sheet Information Based on absorption costing Finished-goods inventory. Retained eamings". End of Year 1 End of Year 2 $5,250 $ 0 8,250 12,300 Based on variable costing Finished-goods inventory .. Retained eamings" End of Year 1 End of Year 2 $1,750 4,750 $ 0 12,300 "For convenience, assume that the company pays no taxes in Year 1 and Year 2, and operating income equals net income for computing of retained eamings. Year 1 Year 2 Sales (in units). 2,500 2,500 Production (in units). 3,000 2,000 Production costs: $10,500 $ 7,000 Variable manufacturing costs . Fixed manufacturing overhead. Selling and administrative expenses: 21,000 21,000 Variable.. Fixed -- 12,500 12,500 10,000 10,000 ...... ...
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