Required information

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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:

	Year 1			Year 2
Sales (in units)		3,000			3,000
Production (in units)		3,600			2,400
Production costs:
Variable manufacturing costs	$	15,480		$	10,320
Fixed manufacturing overhead		19,080			19,080
Selling and administrative costs:
Variable		12,000			12,000
Fixed		11,000			11,000

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	$	5,760		$	0
Retained earnings		8,700			13,840
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	2,580		$	0
Retained earnings		5,520			13,840

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).

I Completed both 1 and 2, but I do not understand 3. Also, if someone could check my work on 1 and 2 that be very helpful. Thanks

Required 1Required 2 Required 3 Prepare operating income statements for both years based on absorption costing LEHIGHTON CHALK COMPANY Income Statement Year 1 Year 2 66,000 66,000 ales 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 5,760 29,400 35,160 0 35,160 30,840 23,000 7,840 34,560 34, 5601 5,760 $ 28,800 $ $37,200 $ Gross margin 23,000 elling and administrative expenses Operating income $14,200 $