Lehighton Chalk Company manufactures sidewalk chalk, which itsells online by the box at $22 per unit. Lehighton uses an actualcosting system, which means that the actual costs of directmaterial, direct labor, and manufacturing overhead are entered intowork-in-process inventory. The actual application rate formanufacturing overhead is computed each year; actual manufacturingoverhead is divided by actual production (in units) to compute theapplication rate. Information for Lehighton’s first two years ofoperation is as follows:
| Year 1 | Year 2 |
| Sales (in units) | | 3,100 | | | 3,100 | |
| Production (in units) | | 3,600 | | | 2,600 | |
| Production costs: | | | | | | |
| Variable manufacturing costs | $ | 15,840 | | $ | 11,440 | |
| Fixed manufacturing overhead | | 19,440 | | | 19,440 | |
| Selling and administrative costs: | | | | | | |
| Variable | | 12,400 | | | 12,400 | |
| Fixed | | 11,400 | | | 11,400 | |
|
Selected information from Lehighton’s year-end balance sheetsfor 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 | $ | 4,900 | | $ | 0 | |
| Retained earnings | | 8,520 | | | 14,440 | |
| | | | | | |
| Based on variable costing | End of Year 1 | End of Year 2 |
| Finished-goods inventory | $ | 2,200 | | $ | 0 | |
| Retained earnings | | 5,820 | | | 14,440 | |
|
Prepare operating income statements for both years based onabsorption costing.
Prepare operating income statements for both years based onvariable costing.
Prepare a numerical reconciliation of the difference in incomereported under the two costing methods used in requirements (1) and(2).
