Q1: ABC Company manufactures sidewalk chalk, which it sells online by the box at $50 per unit. ABC 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 ABC's first two years of operation is as follows: Year 1 Year 2 Sales (in Units) 2500 2500 Production (in units) 3000 2000 Production costs: Variable manufacturing costs 21000 14000 Fixed manufacturing overhead 42000 42000 Selling and administrative costs: Variable 25000 25000 Fixed 20000 20000 Required: ABC 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