Refer to Problem 9-31.

Assume that you have prepared financial statements that show the operating profit for each of the two baskets manufactured by Bob’s Baskets. Further assume that under the activity-based costing approach (requirement [a] in Problem 9-31), the deluxe baskets are less profitable than when you used only direct labor costs to allocate overhead costs (requirement [c] in Problem 9-31). You know that if management sees the activity-based costing results, the company will probably quit producing deluxe baskets. You have friends who work on the production and marketing of deluxe baskets and you believe that they would lose their jobs if management dropped this line.

Data from in Exercise 9-31.

Bob’s Baskets, Inc., manufactures and sells two types of baskets, deluxe and standard. Last year, Bob’s Baskets had the following costs and revenues:

Bob’s Baskets currently uses labor costs to allocate all overhead but 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:

Required Should you show the activity-based costing results to management?

Transcribed Image Text:

Revenue.. Direct materials Direct labor Overhead costs Administration Production setup Quality control.... Distribution Operating profit. BOB'S BASKETS, INC. Income Statement Deluxe Standard Total $144,000 $160,000 $304,000 20,000 20,000 40,000 48,000 72,000 120,000 20,000 40,000 20,000 16,000 $ 48,000