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			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

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	190	190
Distribution	Number of units shipped	1,800	6,400

Required:

a. Complete the income statement using the preceding activity bases. (Do not round intermediate calculations.)

	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

c. Restate the income statement for EZ-Seat using direct labor costs as the only overhead allocation base. (Do not round intermediate calculations.)

	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

Thanks for your help!

Answer 1

a. Statement Showing Income Statement
	Ergo	Standard	Total
Sales Revenue	$2,000,000	$5,000,000	$7,000,000
Less:
Direct Material	$600,000	$1,500,000	$2,100,000
Direct Labour	$400,000	$500,000	$900,000
Overhead cost	$699,000	$1,318,000	$2,017,000
Operating Profit/ (Loss)	$301,000	$1,682,000	$1,983,000

Working Note:-

	Budgeted Qty of Allocation Base			Allocation Rate (D)	Total Budgeted Indirect Cost (E)
	Ergo (A)	Standard (B)	Total Activity pool (c=A+B)
Administration	400000	500000	900000	60%	$540,000.00
Production Setup	50	100	150	$2,900.00	$435,000.00
Quality Control	190	190	380	$800.00	$304,000.00
Distribution	1800	6400	8200	$90.00	$738,000.00
Total Overhead					$2,017,000.00

ABC Indirect Manufacturing cost per unit
Activity	Cost Allocation Rate (A)		Quantity of Cost Allocation Base Used By		Allocated Activity Cost per Wheel
			ERGO(B)	Standard (C )	ERGO(AXB)	Standard (AXC)
Administration	$0.60	Per Labour Cost	400000	500000	$240,000.00	$300,000.00
Production Setup	$2,900.00	No. of Production Run	50	100	$145,000.00	$290,000.00
Quality Control	$800.00	No. of Inspection	190	190	$152,000.00	$152,000.00
Distribution	$90.00	No. unit Shipped	1800	6400	$162,000.00	$576,000.00
Total ABC allocated Indirect Cost					$699,000.00	$1,318,000.00

b. Statement Showing Income Statement
	Ergo	Standard	Total
Sales Revenue	$2,000,000	$5,000,000	$7,000,000
Less:
Direct Material	$600,000	$1,500,000	$2,100,000
Direct Labour	$400,000	$500,000	$900,000
Overhead cost	$896,444	$1,120,556	$2,017,000
Operating Profit/ (Loss)	$103,556	$1,879,444	$1,983,000

Working Note

Computation of Plant wide Overhead Rate
Total Overhead	/	Total Direct Labour cost	=	Plant Wide OH Rate
$2,017,000.00	/	900000	=	224.11%

Computation of Manufacturing Overhead Cost per Wheel
	Plantwide OH Rate	X	Direct Labour Cost	TotalManufacturing OH
Ergo	224.11%	X	400000	$896,444.44
Standard	224.11%	X	500000	$1,120,555.56