Comparative Income Statements and Management Analysis 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 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:

Required

a. Complete the income statement using the preceding activity bases.

b. Write a brief report indicating how management could use activity-based costing to reduce costs.

c. Restate the income statement for EZ-Seat 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 to 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 cause EZ-Seat management to make suboptimal decisions.

Transcribed Image Text:

Revenue Direct materials Direct labor Indirect costs Administration Production setup Quality control Sales and marketing Operating profit EZ-SEAT, INC. Income Statement Ergo $1,950,000 550,000 400,000 Standard $1,840,000 Total $3,790,000 500,000 1,050,000 200,000 600,000 195,000 450,000 300,000 600,000 $ 595,000