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	$	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.)

Answer 1

· 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