Question

Pepper’s Products manufactures and sells two types of chew toys for pets, Squeaky and Silent. In May, Pepper’s Products had the following costs and revenues:

Pepper's Products Income Statement
For the Month of May
	Squeaky			Silent			Total
Sales revenue	$	148,000		$	160,000		$	308,000
Direct materials		20,000			18,000			38,000
Direct labor		80,000			20,000			100,000
Overhead costs
Administration								20,000
Production setup								42,000
Quality control								20,800
Distribution								19,000
Operating profit							$	68,200

Pepper’s Products currently uses labor costs to allocate all overhead but 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:

		Activity Level
Activity	Cost Driver	Squeaky	Silent
Setting up	Number of production runs	10	18
Performing quality control	Number of inspections	40	40
Distribution	Number of units shipped	80,000	110,000

Required:

a. Complete the income statement using the preceding activity bases. (Do not round intermediate calculations.)

c. Restate the income statement for Pepper's Products using direct labor costs as the only overhead allocation base. (Do not round intermediate calculations.)

Answer 1

STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Admin			DLC	20000	100000	0.2
Setup			Runs	42000	28	1500
Quality control			Inspections	20800	80	260
Distribution			Units shipped	19000	190000	0.1
Income Statement (ABC)
			Squekly	Silent	Total
Sales revenue			148000	160000	308000
Less: Direct Material			20000	18000	38000
Less: Direct labour			80000	20000	100000
Gross profit			48000	122000	170000
Overheads
Admin (0.20 er $ DLC)			16000	4000	20000
Setup @ 1500 per run)			15000	27000	42000
			(10*1500)	(18*1500)
Quality Control (260 per inspection)			10400	10400	20800
			(40*260)	(40*260)
Distribution (0.10 per Units)			8000	11000	19000
			(80000*0.10)	(110000*0.10)
Net Operating income			-1400	69600	68200
Req 2.
Overheads total			101800
Divide: Total DLC			100000
OH cost as % of DLC			101.80%
Income Statement (ABC)
			Squekly	Silent	Total
Sales revenue			148000	160000	308000
Less: Direct Material			20000	18000	38000
Less: Direct labour			80000	20000	100000
Gross profit			48000	122000	170000
Overheads			81440	20360	101800
			(80000*101.80%)	(20000*101.80%)
Net Income			-33440	101640	68200