Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $25 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)		2,600			2,600
Production (in units)		3,100			2,100
Production costs:
Variable manufacturing costs	$	15,500		$	10,500
Fixed manufacturing overhead		18,600			18,600
Selling and administrative costs:
Variable		10,400			10,400
Fixed		9,400			9,400

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	$	5,500		$	0
Retained earnings		11,100			19,000
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	2,500		$	0
Retained earnings		8,100			19,000

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).

Year 1 Year 2 Choose 1 Below: Cost of Goods Available for Sale Cost of Goods Manufactured Sales Revenue Selling and Administrative Expenses Unearned Revenue Cost of Goods Sold Beginning Finished Goods Inventory Cost of Goods Available for Sale Cost of Goods Manufactured Cost of Goods Sold Ending Finished-goods Inventory Variable Selling and Administrative Costs Total Variable Costs Choose 1 Below Contribution Margin Contribution Loss Gross Margin Gross Loss Fixed Costs Choose 2 Below Cost of Goods Available for Sale Cost of Goods Manufactired Fixed Manufacturing Costs Fixed Selling and Administrative Expenses Unearned Revenue Total Fixed Costs Choose 1 Below: Operating Income Operating Loss Year 1 Year 2 Choose 1 Below Cost of Goods Available for Sale Cost of Goods Manufactured Sales Revenue Selling and Administrative Expenses Unearned Revenue Cost of Goods Sold Choose 5 Below Beginning Finished Goods Inventory Cost of Goods Available for Sale Cost of Goods Manufactured Cost of Goods Sold Ending Finished-goods Inventory Variable Selling and Administrative Costs Choose 1 Below: Contribution Margin Contribution Loss Gross Margin Gross Loss Choose 1 Below Cost of Goods Available for Sale Cost of Goods Manufactired Sales Revenue Selling and Administrative Expenses Unearned Revenue Choose 1 Below: Operating Income Operating Loss Absorption- minus variable- costing operating income Actual fixed- overhead Difference in fixed overhead Change in Inventory (in units) Year rate expensed 1 X 2 X