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 following statement. EZ-SEAT, INC. Income Statement Ergo Standard Total Sales revenue 2,000,000 5,000,000 7,000,000 Direct materials 600,000 1,500,000 2,100,000 Direct labor 400,000 500,000 900,000 Overhead costs Administration 720,000 Production setup 496,000 Quality control 336,000 Distribution 800,000 Operating profit 1,648,000 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 1,500 6,500 Required: a. Complete the income statement using the preceding activity bases. b. Restate the income statement for EZ-Seat using direct labor costs as the only overhead allocation base.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
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 following statement.
| EZ-SEAT, INC. | |||
| Income Statement | |||
| Ergo | Standard | Total | |
| Sales revenue | 2,000,000 | 5,000,000 | 7,000,000 |
| Direct materials | 600,000 | 1,500,000 | 2,100,000 |
| Direct labor | 400,000 | 500,000 | 900,000 |
| Administration | 720,000 | ||
| Production setup | 496,000 | ||
| Quality control | 336,000 | ||
| Distribution | 800,000 | ||
| Operating profit | 1,648,000 |
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 | 1,500 | 6,500 |
Required:
a. Complete the income statement using the preceding activity bases.
b. Restate the income statement for EZ-Seat using direct labor costs as the only overhead allocation base.
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