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 $2,000,000 $5,000,000 600,000 1,500,000 400,000 500,000 Total $7,000,000 2,100,000 900,000 Sales revenue Direct materials Direct labor Overhead costs Administration Production setup Quality control Distribution Operating profit 630,000 480,000 294,000 702,000 $1,894,000 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 50 100 210 210 1,600 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. Complete this question by entering your answers in the tabs below. Required A Required C Restate the income statement for EZ-Seat using direct labor costs as the only overhead allocation base. (Do not round intermediate calculations.) $ Account Sales revenue Direct materials Direct labor Overhead costs Ergo Standard 2,000,000 $ 5,000,000 $ 600,000 1,500,000 400,000 500,000 Total 7,000,000 2,100,000 900,000 0 Operating profit (loss) $ 1,000,000 $ 3,000,000 $ 4,000,000

Answer 1

a.

Account	Ergo	Standard	Total
Sales revenue	$        2,000,000	$        5,000,000	$        7,000,000
Direct material	$            600,000	$        1,500,000	$        2,100,000
Direct labour	$            400,000	$            500,000	$            900,000
Overhead costs
Administration (4:5)	$            280,000	$            350,000	$            630,000
production setup (50:100)	$            160,000	$            320,000	$            480,000
Quality control (210:210)	$            147,000	$            147,000	$            294,000
Distribution (1600:6200)	$            144,000	$            558,000	$            702,000
Total overhead costs	$            731,000	$        1,375,000	$        2,106,000
Operating profit/(loss)	$            269,000	$        1,625,000	$        1,894,000

c.

Account	Ergo	Standard	Total
Sales revenue	$        2,000,000	$        5,000,000	$        7,000,000
Direct material	$            600,000	$        1,500,000	$        2,100,000
Direct labour	$            400,000	$            500,000	$            900,000
Overhead costs	$            936,000	$        1,170,000	$        2,106,000
Operating revenue /(loss)	$              64,000	$        1,830,000	$        1,894,000