1. Reconcile Lehightons operating income reported under absorption and variable costing, during each year, by comparing the following two amounts on each income statement:

• Cost of goods sold
• Fixed cost (expensed as a period expense)

[The following information applies to the questions displayed below.] Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $23 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 Lehighton's first two years of operation is as follows: Year 1 Year 2 3,2003 ,200 3,600 2,800 Sales (in units) Production (in units) Production costs: Variable manufacturing costs Fixed manufacturing overhead Selling and administrative costs: Variable Fixed $16,200 19,800 $12,600 19,800 12,800 11,800 12,800 11,800 Selected information from Lehighton's 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 Finished-goods inventory $ 4,000 Retained earnings 11,500 End of Year 2 $ 0 21,400 Based on variable costing Finished-goods inventory Retained earnings End of Year 1 $ 1,800 9,300 End of Year 2 $ 0 21,400 Year 1 Year 2 Cost of goods sold under absorption costing Variable manufacturing costs under variable costing Subtotal Fixed manufacturing overhead as period expense under variable costing Total $ 0 $ Operating income under variable costing Less: Operating income under absorption costing Difference in operating income 0