Sleep Tight 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, Sleep Tight had the following revenues and costs:

Sleep Tight 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:

a. Complete the income statement using the activity bases above.
b. Write a brief report indicating how management could use activity-based costing to reduce costs.
c. Restate the income statement for Sleep Tight using direct labor costs as the only overhead allocation base.
d. Write a report to management stating why product-line profits differ using activity-based costing compared with the traditional approach. Indicate whether activity-based costing provides more accurate information and why (if you believe it does provide more accurate information). Indicate in your report how the use of labor-based overhead allocation could result in Sleep Tight management making suboptimaldecisions.

Transcribed Image Text:

Sleeper $280,000 110,000 50,000 Total Dreamer $695,000 250,000 100,000 Revenue Direct Materials Direct Labor Indirect Costs: $975,000 360,000 150,000 Administration Production Setup Quality Contro Sales and Marketing 50,000 75,000 90,000 150,000 $100,000 Operating Profit Activity Level Activity Cost Driver Production Setup Quality Control Sales and Marketing Number of Production Runs Number of Inspections Number of Advertisements Dreamer 10 20 25 Sleeper 15 70