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:

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, 300 2,700 Year 2 2, 300 1,900 Variable manufacturing costs Fixed manufacturing overhead $ 9,720 6,840 13,230 13,230 Selling and administrative costs: Variable Fixed 9,200 8, 200 9,200 8, 200 Selected information from Lehighton's year-end balance sheets for its first twyears 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 8,150 End of Year 1 6,190 End of Year 2 15,180 End of Year 2 15,180 $3,400 Based on variable costing Finished-goods inventory Retained earnings $1,440 Prepare operating income statements for both years based on absorption costing. LEHIGHTON CHALK COMPANY Income Statement Year 1 Year 2 Sales revenue Cost of goods sold: Beginning finished-goods inventory Cost of goods manufactured Cost of goods available for sale Ending finished-goods inventory Cost of goods sold 0 0 $ 0 Gross margin Selling and administrative expenses Operating income 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: Total variable costs: Fixed costs: Total fixed costs Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2) Absorption- ActualDifference inminus fixed- Change in Inventory (in units) fixed variable- costing operating income Year overhead overhead expensecd rate