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 Lehightons first two years of operation is as follows:

	Year 1			Year 2
Sales (in units)		2,400			2,400
Production (in units)		3,000			1,800
Production costs:
Variable manufacturing costs	$	11,100		$	6,660
Fixed manufacturing overhead		14,100			14,100
Selling and administrative costs:
Variable		9,600			9,600
Fixed		8,600			8,600

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	$	5,040		$	0
Retained earnings		8,940			15,040
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	2,220		$	0
Retained earnings		6,120			15,040

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.

• Required 1

Prepare operating income statements for both years based on absorption costing.

LEHIGHTON CHALK COMPANY
Income Statement
	Year 1	Year 2
Cost of goods sold:
	$0	$0
	$0	$0
	$0	$0

• Required 2

Prepare operating income statements for both years based on variable costing.

LEHIGHTON CHALK COMPANY
Income Statement
	Year 1	Year 2
Cost of goods sold:
	$0	$0
Total variable costs:	$0	$0
	$0	$0
Fixed costs:
Total fixed costs	$0	$0
	$0	$0

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