Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $26 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)		2,800			2,800
Production (in units)		3,400			2,200
Production costs:
Variable manufacturing costs	$	17,680		$	11,440
Fixed manufacturing overhead		21,080			21,080
Selling and administrative costs:
Variable		11,200			11,200
Fixed		10,200			10,200

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

$

6,840

$

0

Retained earnings

13,980

23,320

Based on variable costing

End of Year 1

End of Year 2

Finished-goods inventory

$

3,120

$

0

Retained earnings

10,260

23,320

Required:

Lehighton Chalk Company had no beginning or ending work-in-process inventories for either year.

Prepare operating income statements for both years based on absorption costing.

Prepare operating income statements for both years based on variable costing.

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

QUESTION: Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2).

NOTE: The second box under "Change in Inventory" has a multiple selection to the right which is either selecting increase or decrease.

Year	Change in Inventory (in units)			Actual fixed-overhead rate	Difference in fixed overhead expensed	Absorption- minus variable-costing operating income
1		select: increase or decrease
2		select: increase or decrease