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 $2,925,000 550,000 400,000 Standard $2,760,000 500,000 200,000 Total Sales revenue Direct materials Direct labor Overhead costs Administration $5,685,000 1,050,000 600,000 468,000 1,080,000 720,000 1,440,000 Production setup Quality control Distribution 327,000 Operating profit 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 Ergo Standard 50 Activity Base Setting up Performing quality control Distribution Cost Driver Number of production runs Number of inspections Number of units shipped 100 200 200 6,000 1,500

Answer 1

Answer

• Requirement [a]

	Ergo	Standard	Total
Sales revenue	$2,925,000	$2,760,000	$5,685,000
Direct Materials	$550,000	$500,000	$1,050,000
Direct Labor	$400,000	$200,000	$600,000
Overhead costs:			$0
Administration	$312,000	$156,000	$468,000
Production Setup	$360,000	$720,000	$1,080,000
Quality Control	$360,000	$360,000	$720,000
Distribution	$288,000	$1,152,000	$1,440,000
Total Overhead costs	$1,320,000	$2,388,000	$3,708,000
Operating Profits (Loss)	$655,000	($328,000)	$327,000

--Workings

Administration	=468000*400000/600000	=468000*200000/600000
Production Setup	=1080000*50/150	=1080000*100/150
Quality Control	=720000*200/400	=720000*200/400
Distribution	=1440000*1500/7500	=1440000*6000/7500

• Requirement [c]

	Ergo	Standard	Total
Sales revenue	$2,925,000	$2,760,000	$5,685,000
Direct Materials	$550,000	$500,000	$1,050,000
Direct Labor	$400,000	$200,000	$600,000
Overhead costs	$2,472,000	$1,236,000	$3,708,000
Operating Profits (Loss)	($497,000)	$824,000	$327,000

--Working

Overhead costs

=3708000*400000/600000

=3708000*200000/600000