Leighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $25 per unit. Leighton 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 Leighton's first two years of operations is as follows:

	YEAR 1	YEAR 2
Sale (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 Leighton's year-end balance sheets for its first two years of operations is as follows:

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

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

1. Prepare operating income statements for both years 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 costing methods use in requirements (1) and (2).

1.

	LEHIGHTON CHALK COMPANY
	Income Statement
	Year 1	Year 2
Costs of goods sold

2.

	LEHIGHTON CHALK COMPANY
	Income Statement
	Year 1	Year 2
Costs of goods sold
Total Variable Costs

Fixed Costs

3.

Year	Change in inventory (in units)		Actual fixed overhead rate	Difference in fixed overhead expensed	Absorption minus variable costing operating income
1	(number in units goes here and increase or decrease will be selected) increase or decrease	X
2	(number in units goes here and increase or decrease will be selected) increase or decrease	X