Using machine-hours to allocate production overhead, complete the income statement for Ellis Equipment. Follow the controller's recommendation and do not attempt to allocate facility administration or miscellaneous fixed overhead. Complete the income statement using the bases recommended by the controller. How might activity-based costing result in better decisions by Ellis Equipment’s management?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Ellis Equipment (EE), manufactures three models of lawn tractor: EE-1000, EE-1800, and EE-2800. Because of the different materials used, production processes for each model differ significantly in terms of machine types and time requirements. Once parts are produced, however, assembly time per unit required for each type of tractor is similar. For this reason, EE allocates overhead on the basis of machine-hours. Last quarter, the company shipped 8,000 EE-1000s, 3,200 EE-1800s, and 800 EE-2800s. The revenues and expenses for the last quarter were as follows:
| ELLIS EQUIPMENT | ||||
| Income Statement | ||||
| For the Quarter Ended June 30 | ||||
| EE-1000 | EE-1800 | EE-2800 | Total | |
|---|---|---|---|---|
| Sales revenue | $ 12,800,000 | $ 8,000,000 | $ 3,520,000 | $ 24,320,000 |
| Direct costs | ||||
| Direct materials | 4,800,000 | 3,200,000 | 1,120,000 | 9,120,000 |
| Direct labor | 1,680,000 | 768,000 | 230,400 | 2,678,400 |
| Variable overhead | ||||
| Setting up machines | 1,400,000 | |||
| Quality testing | 1,800,000 | |||
| Painting | 780,000 | |||
| Operating equipment | 155,000 | |||
| Shipping | 756,000 | |||
| Contribution margin | $ 7,630,600 | |||
| Fixed overhead | ||||
| Facility administration | 1,430,000 | |||
| Miscellaneous fixed overhead | 3,300,000 | |||
| Gross profit | $ 2,900,600 |
The plant manager asked the plant controller about the possibility of adopting ABC. After consulting with the production supervisors in the plant, the controller recommended the following:
| Activity | Cost Driver | Activity Level | ||
|---|---|---|---|---|
| EE-1000 | EE-1800 | EE-2800 | ||
| Setting up machines | Number of production runs | 154 | 238 | 308 |
| Quality testing | Number of tests | 320 | 200 | 80 |
| Painting | Units shipped | 8,000 | 3,200 | 800 |
| Operating equipment | Machine-hours | 5,000 | 8,000 | 12,000 |
| Shipping | Number of units shipped | 8,000 | 3,200 | 800 |
The controller also recommended that facility administration and miscellaneous fixed overhead costs not be applied to products, especially in the initial experiment with ABC.
Required:
-
Using machine-hours to allocate production overhead, complete the income statement for Ellis Equipment. Follow the controller's recommendation and do not attempt to allocate facility administration or miscellaneous fixed overhead.
-
Complete the income statement using the bases recommended by the controller.
-
How might activity-based costing result in better decisions by Ellis Equipment’s management?
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
