Income statement

	Deluxe	Family	Total
Revenue	$180,000	$200,000	$380,000
Direct materials	25,000	25,000	50,000
Direct labor	90,000	60,000	150,000
Indirect costs:
Administration	-------	----------	25,000
Production setup	-------	----------	50,000
Quality control	-------	----------	25,000
Marketing	-------	----------	20,000
Operating profit			$60,000

Filmworks Photography 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 and to use the following bases to allocate the remaining overhead:

Cost driver Units

Activity Cost driver Student Family

Production setup Photo sessions 150 250

Quality control Customer inspections 300 200

Marketing Advertisements 60 40

1. Complete the income statement using these activity bases.

2. Write a report describing how management might use activity-based costing to reduce costs.

3. Restate the income statement for Filmworks Photography using direct labor costs as the only overhead allocation base.

4. Write a report to management stating why product line profits differ using activity-based costing compared to the traditional approach. Indicate whether the activity-based costing method

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 Filmworks Photography management making suboptimal decisions.