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 $3,000,000 $4,000,000 900,000 1,200,000 600,000 400,000 Total $7,000,000 2,100,000 1,000,000 Sales revenue Direct materials Direct labor Overhead costs Administration Production setup Quality control Distribution Operating profit 500,000 512,000 336,000 760,000 $1,792,000 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 Base Setting up Performing quality control Distribution Cost Driver Number of production runs Number of inspections Number of units shipped Activity Level Ergo Standard 60 100 210 210 1,400 6,200 Required: a. Complete the income statement using the preceding activity bases. c. Restate the income statement for EZ-Seat using direct labor costs as the only overhead allocation base.

Answer 1

1) Income statement using activities

	Ergo	Standard	Total
Sales revenue	3000000	4000000	7000000
Direct material	900000	1200000	2100000
Direct labor	600000	400000	1000000
Overhead
Administration	300000	200000	500000
Setting up*	192000	320000	512000
Quality control	168000	168000	336000
Distribution	140000	620000	760000
Operating profit (loss)	700000	1092000	1792000

1) Income statement using Direct labor cost

	Ergo	Standard	Total
Sales revenue	3000000	4000000	7000000
Direct material	900000	1200000	2100000
Direct labor	600000	400000	1000000
Overhead	1264800	843200	2108000
Operating profit (loss)	235200	1556800	1792000