38 Comparative income statements and management analysis Mar

38. Comparative income statements and management analysis. Marathon, Inc., manufac types of shoes: X-Trainer and Court. Last year, Marathon had the following tures two costs and revenues MARATHON, INC. Income Statement For the Year Ended December 31, XXXX Court X-Trainer Total $800,000 100,000 360,000 $720,000 100,000 240,000 $1,520,000 200,000 600,000 Indirect Costs: 100,000 160,000 150,000 60,000 $250,000 rathon, Inc., currently uses labor costs to allocate all overhead, but managemer is considering implementing an activity-based costing system. After interviewing th sales and production staff, management decides to allocate administrative co basis overhead sts on th of direct labor costs but to use the following cost drivers to allocate the remaini Activity Level

Solution

Answer a. ABC Costing Activity Overhead Cost Driver Quantity Allocation Rate Indirect Costs Administration                100,000                                600,000 Direct labor costs                             0.17 Per Direct labor costs Production Setup                160,000                                     1,000 production runs                         160.00 per production runs Quality Control                150,000                                         500 Inspections                         300.00 per Inspections Sales & Marketing                  60,000                                         200 advertisements                         300.00 per advertisements Total                470,000 Assigning Overhead Cost to Product Model Using ABC Method Activity Based Overhead Rate Court X-Trainer Cost Driver Incurred OH Allocated Cost Driver Incurred OH Allocated Administration                       0.17 Per Direct labor costs                     360,000 Direct labor costs                               60,000               240,000 Direct labor costs                40,000 Production Setup                  160.00 per production runs                             400 production runs                               64,000                       600 production runs                96,000 Quality Control                  300.00 per Inspections                             200 Inspections                               60,000                       300 Inspections                90,000 Sales & Marketing                  300.00 per advertisements                             100 advertisements                               30,000                       100 advertisements                30,000 Total Indirect Cost                             214,000              256,000 Income Statement As per ABC Costing Court X-Trainer Total Revenues                800,000                                720,000                 1,520,000 Direct Material                100,000                                100,000                     200,000 Direct Labor                360,000                                240,000                     600,000 Indirect Costs                214,000                                256,000                     470,000 Net Operating Income                126,000                                124,000                     250,000 Answer b. The product line - X-Trainer is more profitable than Product Line - Court, as per activity basesd costing. Marathon Inc. may increase the production of X-trainer to incerase the total profitability. Answer c. Income Statement Using Direct Labor Cost as Allocation Base Court X-Trainer Total Revenues                800,000                                720,000                 1,520,000 Direct Material                100,000                                100,000                     200,000 Direct Labor                360,000                                240,000                     600,000 Indirect Costs                282,000                                188,000                     470,000 Net Operating Income                  58,000                                192,000                     250,000 Indirect Costs Court - $470,000 X ($360,000/$600,000)                282,000 X-Trainer - $470,000 X ($240,000/$600,000)                188,000