Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $26 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 Lehightons first two years of operation is as follows:

	Year 1			Year 2
Sales (in units)		2,800			2,800
Production (in units)		3,400			2,200
Production costs:
Variable manufacturing costs	$	17,680		$	11,440
Fixed manufacturing overhead		21,080			21,080
Selling and administrative costs:
Variable		11,200			11,200
Fixed		10,200			10,200

Selected information from Lehightons 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	End of Year 1			End of Year 2
Finished-goods inventory	$	6,840		$	0
Retained earnings		13,980			23,320
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	3,120		$	0
Retained earnings		10,260			23,320

Required:

Lehighton 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)

1.2. question two and options

3.

Required 1 Required 2 Required 3 Prepare operating income statements for both years based on absorption costin LEHIGHTON CHALK COMPANY Income Statement Year 1 Year 2 Sales revenue $ 72,800 $ 72,800 $ 0 $ 6,840 38,760 32,520 $ 39,360 Cost of goods sold: Beginning finished-goods inventory Cost of goods manufactured Cost of goods available for sale Ending finished-goods inventory Cost of goods sold Gross margin Selling and administrative expenses Operating income 0 38,760 $ 6,840 $ 31,920 $ 40,880 $ 21,400 19,480 $ $ 39,360 33,440 21,400 12,040 $ LEHIGHTON CHALK COMPANY Income Statement Year 1 Year 2 Sales revenue Cost of goods sold: Beginning finished-goods inventory 0 $ 0 Cost of goods available for sale 0 Cost of goods manufactured $ 0 Cost of goods sold Ending finished-goods inventory 0 $ 0 0 $ 0 Variable selling and administrative costs Fixed costs: Total fixed costs $ 0 0 $ 0 $ $ 0 Year 1 Year 2 Sales revenue Cost of goods sold: $ 0 $ 0 Oo $ 0 Total variable costs: o $ 0 0 $ 0 Contribution margin $ 0 $ 0 Contribution loss $ 0 $ 0 Gross margin Gross loss Required 1 Required 3 LEHIGHTON CHALK COMPANY Income Statement Year 1 Year 2 Sales revenue Cost of goods sold: $ 0 $ 0 0 $ 0 Total variable costs: $ 0 $ 0 $ 0 $ 0 Fixed costs: 0 $ 0 0 $ 0 Cost of goods available for sale Cost of goods manufactured Fixed manufacturing costs Fixed selling and administrative expenses quired 1 Required 3 > Unearned revenue LEHIGHTON CHALK COMPANY Income Statement Year 1 Year 2 Sales revenue Cost of goods sold: $ 0 $ 0 0 $ 0 Total variable costs: $ 0 $ 0 $ 0 $ 0 Fixed costs: Total fixed costs $ 0 0 $ 0 $ 0 Required 1 Required 3 Operating income Operating loss Required 1 Required 2 Required 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) Actual fixed- overhead rate Difference in fixed overhead expensed Absorption- minus variable- costing operating income 1 2 Required 2 Required 3 increase decrease