Question

EZ-Seat, Inc., manufactures two types of reclining chairs, Standard and Ergo. Ergo provides support for the body through a complex set of sensors and requires great care in manufacturing to avoid damage to the material and frame. Standard is a conventional recliner, uses standard materials, and is simpler to manufacture. EZ-Seat's results for the last fiscal year are shown in the following statement. EZ-SEAT, INC. Income Statement Ergo Standard $2,925,000 $2,760,000 558,00 580, eee 400, eee 2 ee, eee Total $5,685,800 1,850, eee 600, eee Sales revenue Direct materials Direct labor Overhead costs Administration Production setup Quality control Distribution Operating profit 468, eee 1,880, 720, eee 1,440, eee $ 327, eee EZ-Seat currently uses labor costs to allocate all overhead, but management is considering implementing an activity-based costing system. After interviewing the sales and production staff, management decides to allocate administrative costs on the basis of direct labor costs but to use the following bases to allocate the remaining costs. Activity Level Activity Base Cost Driver Ergo Standard Setting up Number of production runs 50 100 Performing quality control Number of inspections 200 200 Distribution Number of units shipped 1,582 6,eee Number Cost Drive 3 quality

Answer 1

1)
			Ergo	Standard	total
	Account
	sales revenue		2,925,000	2,760,000	5,685,000
	direct materials		550,000	500,000	1,050,000
	direct labor		400,000	200,000	600,000
	overhead costs:
	Administration		312000	156000	468000
	production setup		360000	720000	1,080,000
	quality control		360000	360000	720,000
	Distribution		288000	1152000	1,440,000
	total overhead costs		1320000	2388000	3,708,000
	operating profit (loss)		655,000	-328,000	327,000
	working notes					rate
	Administration activity rate			468000/600,000=		0.78
	production setup			1,080,000/150=		7200
	quality control			720,000/(200+200)=		1800
	Distribution			1,440,000/(1500+6000)=		192
	(after calcuating rate multiply it with individual activity level)
2)			Ergo	Standard	total
	Account
	sales revenue		2,925,000	2,760,000	5,685,000
	direct materials		550,000	500,000	1,050,000
	direct labor		400,000	200,000	600,000
	overhead costs:		2472000	1236000	3708000
	operating profit		-497,000	824,000	327,000
	working notes
	ergo overhead		3708000/600000*400000
	Standard		3708000/600000*200000