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. Income Statement 3.000000 2.100.000 Direct labor Overhend costs Production setup Quality control 330 000 Operating proft 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 Cent Diver Required a. Complete the income statement using the preceding activity bases. (Do not round Direct labor 1,000 Quality control c. Restate the income statement for EZ-Seat using direct labor costs as the only overhead allocation base. (Do not round intermediate calculations.) Direct materials Direct labor

Explanation / Answer

a Account 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 360,000 240,000 600,000 (60:40) Production setup 155,000 310,000 465,000 (50/100) Quality control 165,000 165,000 330,000 (220/220) Distribution 130,000 610,000 740,000 (1300/6100) Total overhead costs 810,000 1,325,000 2,135,000 Operating profit (loss) $690,000 $1,075,000 $1,765,000 c Account 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       1,281,000       854,000 2,135,000 (60:40) Operating profit (loss) $219,000 $1,546,000 $1,765,000

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