Huron Chalk Company manufactures blackboard chalk for educational uses. The company's product is sold 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: 

Huron Chalk Company had no beginning or ending work-in-process inventories for either year.
1. Prepare operating income statements for both years based on absorption costing.
2. Prepare operating income statements for both years based on variable costing.
3. Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2).

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Sales (in units) Year 1 Year 2 2,500 2,500 3,000 2,000 Production (in units). Production costs: Variable manufacturing costs... $10,500 $ 7,000 Fixed manufacturing overhead. 21,000 21,000 Selling and administrative costs: Variable 12,500 12,500 Fixed.. 10,000 10,000