Normandy Office Products (NOP) makes two types of office desks, Manager and Executive. The Executive model is adjustable using electric motors and is made with upgraded materials. The manufacturing process for the Executive model is more complex than that for the Manager model, requiring more frequent inspections and shorter production runs. The Manager model is a basic desk, using good, but easy to work with, materials, and is simpler to manufacture. NOP’s results for the last fiscal year are shown in the following statement.

NOP 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 but to use the following bases to allocate the remaining costs:

Required

a. Prepare the product line income statement using the proposed activity bases.

b. Write a brief report indicating how management could use activity-based costing to reduce costs.

c. Restate the product line income statement for Normandy Office Products 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 NOP management to make suboptimal decisions. 

Transcribed Image Text:

Sales revenue Direct materials Direct labor... Overhead costs Administration. Machine setup.. Inspection..... Packing and shipping.. Operating profit.... NORMANDY OFFICE PRODUCTS Income Statement Manager $960,000 170,000 120,000 Executive $1,065,000 180,000 150,000 Total $2,025,000 350,000 270,000 216,000 360,000 240,000 480,000 $ 109,000