HURON CHALK COMPANY

HURON CHALK COMPANY

Selected Balance Sheet Information

Finished goods inventory '" ................•...•............

Retained earnings' . .

$5,250

8,250

12,300

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

Finished goods inventory ..............•..................................... ""........... $1,750 $ 0

Retained earnings' 4,750 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 earnings.

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?

Why is the year 2 ending balance in finished-goods inventory the same under absorption and variable costing?

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 .

.t. 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 8-42.)

6. Notice that the retained earnings balance at the end of both years I 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.