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 Lehighton's first two years of operation is as follows:

Year 1 Year 2

Sales (in units) 2,7002,700

Production (in units) 3,3002,100

Production costs:

Variable manufacturing costs $13,200$8,400

Fixed manufacturing overhead 16,50016,500

Selling and administrative costs:

Variable 10,80010,800

Fixed 9,8009,800

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 . End of Year 1` End of Year 2

Finished-goods inventory . $5,400 $0

Retained earnings 14,400 25,600

Based on variable costing End of Year 1 End of Year 2

Finished-goods inventory $2,400 $0

Retained earnings 11,400 25,600

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 numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2)