Questions:
Comparative Income Statements and Management Analysis
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:
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BOB'S BASKETS, INC.
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Income Statement
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Deluxe
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Standard
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Total
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Revenue
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$216,000
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$240,000
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$ 456,000
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Direct materials
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20,000
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20,000
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40,000
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Direct labor
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48,000
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72,000
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120,000
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Overhead costs Administration
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30,000
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Production setup
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60,000
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Quality control
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30,000
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Distribution
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24,000
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Operating profit
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$ 152,000
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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:
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Activity Level
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Activity
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Cost Driver
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Deluxe
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Standard
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Setting up
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Number of production runs
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20
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10
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Performing quality control
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Number of inspections
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60
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20
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Distribution
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Number of units shipped
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80,000
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120,000
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Required
a. Complete the income statement using the preceding activity bases.
b. Write a report indicating how management might use activity-based costing to reduce costs.
c. Restate the income statement for Bob's Baskets 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 management at Bob's Baskets to make suboptimal decisions.