EZ-Seat, Inc., manufactures two types of reclining chairs, Standard and Ergo. Er

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., 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 600,000 Production setup 480,000 Quality control 304,000 Distribution 729,000 Operating profit $1,787,000 E a 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 Base Setting up Performing quality control Distribution Cost Driver Number of production runs Number of inspections Number of units shipped Activity Level Ergo Standard 60 100 190 190 1,800 6,300

Explanation / Answer

EZ -SEAT INC. Activity Centres Ergo Standard Total Estimated cost Administerative cost 0.6 0.4 $            600,000.00 Production Set up 60 Number of Production Run 100 Number of Production Run 160 $            480,000.00 Quality Control 190 Number of Inspection 190 Number of Inspection 380 $            304,000.00 Distribution 1800 Number of Units Shipped 6300 Number of Units shipped 8100 $            729,000.00 Ergo Administerative=($600000*.60) $               360,000.00 Production Set up=($480000*60/160) $               180,000.00 Quality Control=($304000*(190/380) $               152,000.00 Distribution=($729000*(1800/8100) $               162,000.00 Administrative Expenses Ratio on the basis of Direct Labour cost Ergo=($600000/$1000000) 0.6 Standard=($400000/$1000000) 0.4 Standard Administerative=($600000*.40) $               240,000.00 Production Set up=($480000*100/160) $               300,000.00 Quality Control=($304000*(190/380) $               152,000.00 Distribution=($729000*(6300/8100) $               567,000.00 a) Complete the Income Statement using the preceeding Activity Base 3708000 Account Ergo Standard Total Sales Revenue $           3,000,000.00 $                         4,000,000.00 $        7,000,000.00 Direct Material $               900,000.00 $                         1,200,000.00 $        2,100,000.00 Direct Labor $               600,000.00 $                             400,000.00 $        1,000,000.00 Overhead Cost Administerative $               360,000.00 $                             240,000.00 $           600,000.00 Production Setup $               180,000.00 $                             300,000.00 $           480,000.00 Quality Control $               152,000.00 $                             152,000.00 $           304,000.00 Distribution $               162,000.00 $                             567,000.00 $           729,000.00 Total Overhead Cost $               854,000.00 $                         1,259,000.00 $        2,113,000.00 Operating Profit/Loss $               646,000.00 $                         1,141,000.00 $        1,787,000.00 c ) Restate Income Statement for EZ-Seat using Direct Labor cost as the only overhead allocation base Total Overhead Cost $           2,113,000.00 Total Labor cost $           1,000,000.00 Ergo Overhead=($600000/$1000000)*2113000 $           1,267,800.00 Ergo Overhead=($400000/$1000000)*2113000 $               845,200.00 Total Overhead $           2,113,000.00 Account Ergo Standard Total Sales Revenue $           3,000,000.00 $                         4,000,000.00 $        7,000,000.00 Direct Material $               900,000.00 $                         1,200,000.00 $        2,100,000.00 Direct Labor $               600,000.00 $                             400,000.00 $        1,000,000.00 Overhead Cost $           1,267,800.00 $                             845,200.00 $        2,113,000.00 Operating Profit/Loss $               232,200.00 $                         1,554,800.00 $        1,787,000.00

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