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 statement below. EZ-SEAT, INC. Income Statement Ergo Standard $2,925,000 $2,760,000 550,000 500,000 400,000 200,000 Total $5,685,000 1,050,000 600,000 Sales revenue Direct materials Direct labor Overhead costs Administration Production setup Quality control Distribution Operating profit 468,000 1,080,000 720,000 1,440,000 $ 327,000 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 50 100 200 200 1,500 6,000 Required: a. Complete the income statement using the preceding activity bases. (Do not round intermediate calculations.) Standard Total Account Sales revenue Ergo $ 2,925.000 4223, $ 550,000 400,000 2,760,000 $ 500,000 200,000 5,685,000 1,050,000 250.000 600,000 Direct materials Direct labor Overhead costs: Administration Production setup Quality control Distribution Total overhead costs Operating profit (loss) 468,000 1,080,000 720,000 1,440,000

Answer 1

Computation of Overhead Rate
Activities	Costs	Cost drivers	Cost driver total	Overhead rate(Costs/Cost driver total)
Production setup	$10,80,000	No. of setups	150	$7,200.00	per setups
Quality control	$7,20,000	No. of inspection	400	$1,800.00	per inspection
Distribution	$14,40,000	No. of units shipped	7,500	$192.00	per unit shipped
Administration cost will be divided in the ratio of Direct labor cost which is 2:1
Income Statement using ABC rates
Account	Ergo	Standard	Total
Sales Revenue	$29,25,000	$27,60,000	$56,85,000
Direct materials	$5,50,000	$5,00,000	$10,50,000
Direct labor	$4,00,000	$2,00,000	$6,00,000
Overhead Costs:
Administration	$3,12,000	$1,56,000	$4,68,000
Production setup	$3,60,000	$7,20,000	$10,80,000
Quality control	$3,60,000	$3,60,000	$7,20,000
Distribution	$2,88,000	$11,52,000	$14,40,000
Total Overhead Cost	$13,20,000	$23,88,000	$37,08,000
Operating Profit/(Loss)	$6,55,000	-$3,28,000	$3,27,000
Income Statement using Overhead allocation
Account	Ergo	Standard	Total
Sales Revenue	$29,25,000	$27,60,000	$56,85,000
Direct materials	$5,50,000	$5,00,000	$10,50,000
Direct labor	$4,00,000	$2,00,000	$6,00,000
Overhead Costs(Allocated in ratio of 2:1)	$24,72,000	$12,36,000	$37,08,000
Operating Profit/(Loss)	-$4,97,000	$8,24,000	$3,27,000