Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $28 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)		3,100			3,100
Production (in units)		3,700			2,500
Production costs:
Variable manufacturing costs	$	20,350		$	13,750
Fixed manufacturing overhead		24,790			24,790
Selling and administrative costs:
Variable		12,400			12,400
Fixed		11,400			11,400

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	$	7,320		$	0
Retained earnings		19,680			34,120
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	3,300		$	0
Retained earnings		15,660			34,120

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).

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2
• Required 3

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

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