Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $24 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:

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).

Sales (in units) Production (in units) Production costs Year 1 2,400 2,800 Year 2 2,400 2,000 Variable manufacturing costs Fixed manufacturing overhead $13,440 9,60e 16,24016, 240 Selling and administrative costs: Variable Fixed 9,600 8,600 9,600 8,600 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 1 $4,240 8,460 End of Year 2 15,080 End of Year 2 15,080 Based on variable costing Finished-goods inventory Retained earnings End of Year 1 $ 1,920 6,140