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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 Lehighton's first two years of operation is as follows: Year 1 2,400 3,000 Year 2 2,400 1,800 Sales (in units) Production (in units) Production costs: Variable manufacturing costs Fixed manufacturing overhead Selling and administrative costs: Variable Fixed $11,100 14,100 $ 6,660 14,100 9,600 8,600 9,600 8,600 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 $ 5,040 Retained earnings 8,940 End of Year 2 $ 15,040 Based on variable costing Finished-goods inventory Retained earnings End of Year 1 $ 2,220 6,120 End of Year 2 $ 15,040 Case 8-42 Comparison of Absorption and Variable Costing; Actual Costing (LO 8-2, 8-3, 8-4) 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. Required 1 Required 2. Required 3 Prepare operating income statements for both years based on absorption costing. LEHIGHTON CHALK COMPANY Income Statement Year 1 Sales revenue Year 2 52,800 $ 52,800 $ Cost of goods sold: Variable selling and administrative costs Ending finished-goods inventory $ 0 $ CA 0 S 52,800 $ 52,800 52,800 $ 52,800 Required 1 Required 2. Required 3 Prepare operating income statements for both years based on variable costing. LEHIGHTON CHALK COMPANY Income Statement Year 1 Year 2 Cost of goods sold: $ 0 $ 0 Total variable costs: $ 0 $ 0 Fixed costs: $ 6969 0 S 0 Total fixed costs $ $ ola lu $ 0 0 Required 1 Required 2 Required 3 hi Prepare a numerical reconciliation of the difference in income reported under the two costing m and 2. Year Change in Inventory (in units) Actual fixed- overhead rate Difference in fixed overhead expensed Absorption- minus variable- costing operating income 1 2