Question

In: Accounting

EZ-Seat, Inc., manufactures two types of reclining chairs, Standard and Ergo. Ergo provides support for the...

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 $ 3,000,000 $ 4,000,000 $ 7,000,000
Direct materials 900,000 1,200,000 2,100,000
Direct labor 600,000 400,000 1,000,000
Overhead costs
Administration 700,000
Production setup 480,000
Quality control 294,000
Distribution 624,000
Operating profit $ 1,802,000

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 60 100
Performing quality control Number of inspections 210 210
Distribution Number of units shipped 1,600 6,200

Required:

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

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

Solutions

Expert Solution

· Requirements asked

>Profit using activity bases

Ergo

Standard

Total

Sales revenue

$3,000,000

$4,000,000

$7,000,000

Direct Materials

$900,000

$1,200,000

$2,100,000

Direct Labor

$600,000

$400,000

$1,000,000

Overhead costs:

$0

Administration

$420,000

$280,000

$700,000

Production Setup

$180,000

$300,000

$480,000

Quality Control

$147,000

$147,000

$294,000

Distribution

$128,000

$496,000

$624,000

Total Overhead costs

$875,000

$1,223,000

$2,098,000

Operating Profits (Loss)

$625,000

$1,177,000

$1,802,000

--Working

Ergo

Standard

Sales revenue

3000000

4000000

Direct Materials

900000

1200000

Direct Labor

600000

400000

Overhead costs:

Administration

=700000*600000/1000000

=700000*400000/1000000

Production Setup

=480000*(60/160)

=480000*(100/160)

Quality Control

=294000*(0.5)

=294000*(0.5)

Distribution

=624000*1600/7800

=624000*6200/7800

            >Profits using Direct labor cost allocation

Ergo

Standard

Total

Sales revenue

$3,000,000

$4,000,000

$7,000,000

Direct Materials

$900,000

$1,200,000

$2,100,000

Direct Labor

$600,000

$400,000

$1,000,000

Overhead costs

$1,258,800

$839,200

$2,098,000

Operating Profits (Loss)

$241,200

$1,560,800

$1,802,000

--Working

Ergo

Standard

Sales revenue

3000000

4000000

Direct Materials

900000

1200000

Direct Labor

600000

400000

Overhead costs

=2098000*600000/1000000

=2098000*400000/1000000


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