Shoe Express, Inc., manufactures two types of shoes, B-Ball and Marathon. The B-Ball shoe has a...

 

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Shoe Express, Inc., manufactures two types of shoes, B-Ball and Marathon. The B-Ball shoe has a complex design that uses gel-filled compartments to provide support. The Marathon shoe is simpler to manufacture and uses conventional foam padding. Last year, Shoe Express had the following revenues and costs: Revenue Direct materials Direct labor Indirect costs: Required Administration Production setup Quality control Advertising Net income before taxes SHOE EXPRESS, INC. Income Statement Activity Production setup Quality control Advertising B-Ball Marathon Total $390,000 $368,000 $758,000 110,000 100,000 210,000 80,000 40,000 120,000 Shoe Express 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 overhead: Cost Drivers Production runs Inspections Advertisements 40,000 90,000 60,000 120,000 $118,000 20 40 12 Activity Level B-Ball Marathon 20 20 48 a. Complete the income statement using these activity bases. b. c. d. Write 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 Shoe Express management making suboptimal decisions. Write a brief report indicating how management could use activity-based costing to reduce costs. Restate the income statement for Shoe Express, Inc., using direct labor costs as the only overhead allocation base. Shoe Express, Inc., manufactures two types of shoes, B-Ball and Marathon. The B-Ball shoe has a complex design that uses gel-filled compartments to provide support. The Marathon shoe is simpler to manufacture and uses conventional foam padding. Last year, Shoe Express had the following revenues and costs: Revenue Direct materials Direct labor Indirect costs: Required Administration Production setup Quality control Advertising Net income before taxes SHOE EXPRESS, INC. Income Statement Activity Production setup Quality control Advertising B-Ball Marathon Total $390,000 $368,000 $758,000 110,000 100,000 210,000 80,000 40,000 120,000 Shoe Express 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 overhead: Cost Drivers Production runs Inspections Advertisements 40,000 90,000 60,000 120,000 $118,000 20 40 12 Activity Level B-Ball Marathon 20 20 48 a. Complete the income statement using these activity bases. b. c. d. Write 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 Shoe Express management making suboptimal decisions. Write a brief report indicating how management could use activity-based costing to reduce costs. Restate the income statement for Shoe Express, Inc., using direct labor costs as the only overhead allocation base.

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