EZ-Seat, Inc., manufactures two types of reclining chairs,Standard and Ergo. Ergo provides support for the body through acomplex set of sensors and requires great care in manufacturing toavoid damage to the material and frame. Standard is a conventionalrecliner, uses standard materials, and is simpler to manufacture.EZ-Seat’s results for the last fiscal year are shown in thestatement below.
EZ-SEAT, INC.
Income Statement |
| Ergo | Standard | Total |
| Sales revenue | $ | 2,000,000 | | $ | 5,000,000 | | $ | 7,000,000 | |
| Direct materials | | 600,000 | | | 1,500,000 | | | 2,100,000 | |
| Direct labor | | 400,000 | | | 500,000 | | | 900,000 | |
| Overhead costs | | | | | | | | | |
| Administration | | | | | | | | 540,000 | |
| Production setup | | | | | | | | 435,000 | |
| Quality control | | | | | | | | 304,000 | |
| Distribution | | | | | | | | 738,000 | |
| Operating profit | | | | | | | $ | 1,983,000 | |
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EZ-Seat currently uses labor costs to allocate all overhead, butmanagement is considering implementing an activity-based costingsystem. After interviewing the sales and production staff,management decides to allocate administrative costs on the basis ofdirect labor costs but to use the following bases to allocate theremaining costs:
| | Activity Level |
| Activity Base | Cost Driver | Ergo | Standard |
| Setting up | Number of production runs | 50 | 100 |
| Performing quality control | Number of inspections | 190 | 190 |
| Distribution | Number of units shipped | 1,800 | 6,400 |
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Required:
a. Complete the income statement using thepreceding activity bases. (Do not round intermediatecalculations.)
|
| | Account | Ergo | Standard | Total | | Sales revenue | $2,000,000 | $5,000,000 | $7,000,000 | | Direct materials | $600,000 | $1,500,000 | $2,100,000 | | Direct labor | 400,000 | 500,000 | 900,000 | | Overhead costs: | | | | | Administration | | | 540,000 | | Production setup | | | 435,000 | | Quality control | | | 304,000 | | Distribution | | | 738,000 | | Total overhead costs | | | 2,017,000 | | Operating profit(loss) | $1,000,000 | $3,000,000 | $1,983,000 |
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c. Restate the income statement for EZ-Seatusing direct labor costs as the only overhead allocation base.(Do not round intermediate calculations.)
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| | Account | Ergo | Standard | Total | | Sales revenue | $2,000,000 | $5,000,000 | $7,000,000 | | Direct materials | 600,000 | 1,500,000 | 2,100,000 | | Direct labor | 400,000 | 500,000 | 900,000 | | Overhead costs | | | 0 | | Operating profit(loss) | $1,000,000 | $3,000,000 | $4,000,000 |
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Thanks for your help!
