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

Required:
Huron 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).

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Year 1 Sales (In units) Production (in units) Production costs: Year 2 2,500 2,000 2,500 3,000 $10,500 21,000 7,000 21,000 Variable manufacturing costs Fixed manufacturing overhead Selling and administrative expenses: Variable Fixed 12,500 10,000 12,500 10,000