1. Prepare a numerical reconciliation of the difference in income reported under the absorption and variable costing methods used in requirements (1) and (2).

Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $22 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 1 Year 2 Sales (in units) Production (in units) 3,000 3,600 3,000 2,400 Production costs: Variable manufacturing costs Fixed manufacturing overhead Selling and administrative costs: $15,480 19,080 $10,320 19,080 Variable 12,000 11,000 12,000 11,000 Fixed 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 costing Finished-goods inventory Retained earnings End of Year 2 End of Year 1 $5,760 8,700 13,840 Based on variable costing Finished-goods inventory Retained earnings End of Year 2 End of Year 1 $2,580 5,520 13,840 Absorption- minus variable- Actual Difference in Change in Inventory (in units) fixed- fixed overhead Year overhead costing operating income expensed rate