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.

• 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:

• 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:
Total variable costs:
Fixed costs:
Total fixed costs

• 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