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 Hurons first two years of operations is as follows:

	Year 1	Year 2
Sales (in units)	2,500	2,500
Production (in units)	3,100	1,900
Production Costs:
Variable manufacturing costs	$15,190	$9,310
Fixed manufacturing costs	18,290	18,290
Selling & Administrative Expenses:
Variable	10,000	10,000
Fixed	9,000	9,000

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

HULK CHALK COMPANY

Selected Balance Sheet Information

Based on Absorption Costing:	End of Year 1	End of Year 2
Finished Goods Inventory	$6,480	$0.00
Retained Earnings *	11,000	17,720
Based on Variable Costing:
Finished Goods Inventory	$2,940	$0.00
Retained Earnings *	7,460	17,720

* For convenience, assume that dividends for Year 1 is $5,500 and Year 2 is $2,700. No taxes or other expenses were incurred for both the years.

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).

Year	Change in Inventory (in units)	Increase/Decrease		Actual Fixed-overhead expensed	Difference in fixed overhead expenses	Absorption-minus variable-costing operating income
1			x
2			x