Question:

Problem 19-6

Activity-based costing; prepare income statements (L.O. 8, 9)

Filmworks Photography offers two types of services, student portraits and family portraits. Last year, Filmworks had the following costs and revenues:

FILMWORKS PHOTOGRAPHY

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

a. How do I complete the income statement using these activity bases.

b. How should I make a report describing how management might use activity-based costing to reduce costs.

c. How do I restate the income statement for Filmworks Photography using direct labor costs as the only overhead allocation base.

d. How should I make 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.