Mattress Comfort Corporation manufactures two types of mattresses, Dreamer and Sleeper. Dreamer has a complex design that uses gel-filled compartments to provide support. Sleeper is simpler to manufacture and uses conventional padding. Last year, Mattress Comfort had the following revenues and costs: Dreamer Sleeper Total Revenue $700,000 $500,000 $1,200,000 Direct Materials 300,000 150,000 450,000 Direct Labor 150,000 75,000 225,000 Indirect Costs: Administration 60,000 Production Setup 80,000 Quality Control 100,000 Sales and Marketing 180,000 Operating Profit $105,000 Mattress Comfort 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 overhead: Activity Level Activity Cost Driver Dreamer Sleeper Production Setup Number of Production Runs 30 50 Quality Control Number of Inspections 25 75 Sales and Marketing Number of Advertisements 30 70 Assume that each Dreamer mattress is sold for $350 and that each Sleeper mattress is sold for $200. Required: Compute the operating income per unit of each mattress using a traditional costing system. Compute the operating income per unit of each mattress using the activity-based costing system. Explain the difference in the operating profit for each product under the traditional system and ABC. Explain the pros and cons of using activity-based costing.
Mattress Comfort Corporation manufactures two types of mattresses, Dreamer and Sleeper. Dreamer has a complex design that uses gel-filled compartments to provide support. Sleeper is simpler to manufacture and uses conventional padding. Last year, Mattress Comfort had the following revenues and costs:
Dreamer Sleeper Total
Revenue $700,000 $500,000 $1,200,000
Direct Materials 300,000 150,000 450,000
Direct Labor 150,000 75,000 225,000
Indirect Costs:
Administration 60,000
Production Setup 80,000
Quality Control 100,000
Sales and Marketing 180,000
Operating Profit $105,000
Mattress Comfort currently uses labor costs to allocate all
Activity Level
Activity Cost Driver Dreamer Sleeper
Production Setup Number of Production Runs 30 50
Quality Control Number of Inspections 25 75
Sales and Marketing Number of Advertisements 30 70
Assume that each Dreamer mattress is sold for $350 and that each Sleeper mattress is sold for $200.
Required:
- Compute the operating income per unit of each mattress using a traditional costing system.
- Compute the operating income per unit of each mattress using the activity-based costing system.
- Explain the difference in the operating profit for each product under the traditional system and ABC.
- Explain the pros and cons of using activity-based costing.
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