hw_solution_9

# hw_solution_9 - Ch.9 ABC Problem 9-30 a EZ-Seat Inc Income...

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Ch.9 ABC Problem 9-30. a. EZ-Seat, Inc. Income Statement Account Rate Ergo Standard Total Revenue \$1,950,000 \$1,840,000 \$3,790,000 Direct materials \$ 550,000 \$ 500,000 \$1,050,000 Direct labor 400,000 200,000 600,000 Overhead costs: Administration 0.325 a 130,000 e 65,000 195,000 Setting up 3,000 b 150,000 f 300,000 450,000 Performing quality control 750 c 150,000 g 150,000 300,000 Distribution 80 d 120,000 h 480,000 600,000 Total overhead costs 550,000 995,000 1,545,000 Operating profit \$ 450,000 \$ 145,000 \$ 595,000 a0.325 = \$195,000 of Administrative costs ÷ \$600,000 of direct labor costs b\$3,000 = \$450,000 of Production setup costs ÷ 150 production runs c\$750 = \$300,000 of Quality control costs ÷ 400 inspections d\$80 = \$600,000 of Distribution costs ÷ 7,500 units shipped e\$130,000 = \$0.325 x \$400,000 direct labor costs f\$150,000 = \$3,000 per setup x 50 production runs g\$150,000 = \$750 per inspection x 200 inspections h\$120,000 = \$80 per unit x 1,500 units shipped b. Activity-based costing highlights the activities that cause costs, and provides insight into which costs could be reduced. For example, management may be able to operate with fewer but larger production runs, thereby reducing setup costs. Focusing on activities can identify non- value-adding activities that can be eliminated without reducing the product’s value. c. EZ-Seat, Inc. Income Statement Account Rate Ergo Standard Total Revenue \$1,950,000 \$1,840,000 \$3,790,000 Direct Materials 550,000 500,000 1,050,000 Direct Labor 400,000 200,000 600,000 Overhead Costs 2.575 a 1,030,000 b 515,000 1,545,000 Operating Profit \$ (30,000 ) \$ 625,000 \$ 595,000 a2.575 = \$1,545,000 Overhead Costs ÷ \$600,000 Direct Labor Costs b\$1,030,000 = 2.575 Overhead Rate x \$400,000 Direct Labor Costs

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d. Dear Members of the Management Board: The purpose of this report is to explain the differences between the profits of our Ergo and Standard product lines using activity-based costing versus our traditional labor-based overhead allocation methods. The two costing methods differ in their results because of the way overhead costs are allocated between our products; direct costs do not differ under the two methods. Under the labor-based approach, all overhead costs are pooled together and allocated to our products on the basis of direct-labor costs. Under activity-based costing, cost drivers, such as inspections and set-ups, are identified and their costs are applied to the products in relation to usage. Traditional labor-based allocation is less accurate than activity-based allocations because many overhead costs are not well correlated with labor costs. For instance, our Ergo product receives 200% more overhead under our traditional approach than does our Standard product because it uses twice as much labor. However, after analyzing the factors driving the
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## This note was uploaded on 10/29/2009 for the course ACC 066 taught by Professor Kwak during the Spring '08 term at DeAnza College.

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hw_solution_9 - Ch.9 ABC Problem 9-30 a EZ-Seat Inc Income...

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