Question

Flimsy Play Photography offers two types of products, Deluxe Portraits and Regular Portraits. Last year, Flimsy Play had the following revenues and costs:

	Deluxe	Regular	Total
Revenue	$170,000	$190,000	$360,000
Direct materials	$22,000	$22,000	$44,000
Direct labor	$86,000	$55,000	$141,000
Indirect costs:
Administration			$24,000
Production setup			$59,000
Quality control			$24,000
Marketing			$17,000
Operating income			$51,000

Flimsy Play 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 and to use the following bases to allocate the remaining overhead:

		Cost Driver Units
Activity	Cost Driver	Deluxe	Regular
Production setup	Photo sessions	140	240
Quality control	Customer inspections	270	190
Marketing	Advertisements	56	47

Required:  

A. Prepare the income statement using the activity bases indicated for the allocation of the indirect costs to the two products.

B. Prepare the income statement for Flimsy Play using direct labor costs as the only overhead allocation base.

Answer 1

A. Income Statement using Activity Based Costing
	Deluxe	Regular	Total
Revenue	170,000	190,000	360,000
Direct materials	22,000	22,000	44,000
Direct labor	86,000	55,000	141,000
Indirect costs:
Administration	14,638	9,362	24,000
Production setup	21,737	37,263	59,000
Quality control	14,087	9,913	24,000
Marketing	9,243	7,757	17,000
Operating income	2,295	48,705	51,000
Note: In the absence of information, Administration costs are allocated on Direct labour cost basis

		Costs	Cost Driver Units		Rate
Activity	Cost Driver	($)	Deluxe	Regular	Total	(Costs / Cost driver unit)
Production setup	Photo sessions	59,000	140	240	380	155.26
Quality control	Customer inspections	24,000	270	190	460	52.17
Marketing	Advertisements	17,000	56	47	103	165.05
Allocation of costs:
Rate * Cost driver units

B. Income Statement using Direct Labour hours as only overhead allocation base
	Deluxe	Regular	Total
Revenue	170,000	190,000	360,000
Direct materials	22,000	22,000	44,000
Direct labor	86,000	55,000	141,000
Indirect costs:
Administration	14,638	9,362	24,000
Production setup	35,986	23,014	59,000
Quality control	14,638	9,362	24,000
Marketing	10,369	6,631	17,000
Operating income	-13,631	64,631	51,000

	Costs	Total Direct Labour cost	Rate	Deluxe	Regular
Administration	24,000	141,000	0.17	14,638	9,362
Production setup	59,000	141,000	0.42	35,986	23,014
Quality control	24,000	141,000	0.17	14,638	9,362
Marketing	17,000	141,000	0.12	10,369	6,631
Allocation of costs:
Rate * Direct labour cost