Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 49

Activity-Based Reporting: Manufacturing

Leidenheimer Corporation manufactures small airplane propellers. Sales for year 2 totaled $1,700,000. Information regarding resources for the month follows:

	Resources Used	Resources Supplied
Parts management	$ 60,000	$ 70,000
Energy	100,000	100,000
Quality inspections	90,000	100,000
Long-term labor	50,000	70,000
Short-term labor	40,000	48,000
Setups	140,000	200,000
Materials	300,000	300,000
Depreciation	120,000	200,000
Marketing	140,000	150,000
Customer service	20,000	40,000
Administrative	100,000	140,000

In addition, Leidenheimer spent $50,000 on 50 engineering changes with a cost-driver rate of $1,000 and $60,000 on eight outside contracts with a cost driver rate of $7,500.

Required

Management has requested that you do the following:

a.Prepare a traditional income statement.

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b.Prepare an activity-based income statement.

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c. Write a short report explaining why the activity-based income statement provides useful information to managers. Use the information from requirements (a) and (b) to develop examples for your report.

Step 1 of 4

(a) Prepare a traditional income statement:

A traditional income statement reports the operating profit considering the sales revenue and the costs associated with the revenue. The costs include parts management, energy, quality inspections, long-term labor, short-term labor, setups, materials, depreciation, marketing, customer service, administrative, engineering charges and outside contracts. The total costs should be deducted from the total sales revenue to determine the operating profit.

Use the following table to prepare the traditional income statement:

Hence, the operating profit under traditional method is $172,000.