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	$	138,000		$	154,000		$	292,000
Direct materials		19,000			22,000			41,000
Direct labor		80,000			20,000			100,000
Overhead costs
Administration								20,000
Production setup								45,000
Quality control								20,000
Distribution								21,000
Operating profit							$	45,000

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	20
Performing quality control	Number of inspections	40	40
Distribution	Number of units shipped	80,000	130,000

Required:

a. Complete the income statement using the preceding activity bases.

c. Restate the income statement for Pepper's Products using direct labor costs as the only overhead allocation base.

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

	Account Squeaky Silent Total Sales revenue $138,000 $154,000 $292,000 Direct materials 19,000 22,000 41,000 Direct labor 80,000 20,000 100,000 Overhead costs Operating profit (loss)

Answer 1

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Pepper’s Products
Answer a		A	B	C	D=B+C	E=A/D
Calculation of ABC rates for overhead		R	Cost Driver
Activity cost pool	Cost Driver	Cost	Squeaky	Silent	Total	ABC rates
Setting up	Number of production runs	45,000.00	10.00	20.00	30.00	1,500.00
Performing quality control	Number of inspections	20,000.00	40.00	40.00	80.00	250.00
Distribution	Number of units shipped	21,000.00	80,000.00	130,000.00	210,000.00	0.10
Total Cost assigned		86,000.00

		See E	See B	F=B*E	See C	G=C*E
Allocation table			Squeaky	Silent
Activity cost pool	Cost Driver	ABC Rates	Activity used	Cost assigned	Activity used	Cost assigned
Setting up	Number of production runs	1,500.00	10.00	15,000.00	20.00	30,000.00
Performing quality control	Number of inspections	250.00	40.00	10,000.00	40.00	10,000.00
Distribution	Number of units shipped	0.10	80,000.00	8,000.00	130,000.00	13,000.00
Total Cost assigned				33,000.00		53,000.00

Income Statement	Squeaky	Silent	Total
Sales Revenue	138,000.00	154,000.00	292,000.00
Direct Materials	19,000.00	22,000.00	41,000.00
Direct Labor	80,000.00	20,000.00	100,000.00
Overhead costs
Production set up	15,000.00	30,000.00	45,000.00
Quality control	10,000.00	10,000.00	20,000.00
Distribution	8,000.00	13,000.00	21,000.00
Operating Profit (Loss)	6,000.00	59,000.00	65,000.00
Administration cost			20,000.00
Net Profit (Loss)			45,000.00

Calculation of single plant wide OH Rate	Total	Note
Direct Labor costs	100,000.00	H
Overhead costs	86,000.00	I
Predetermined OH Rate	0.86	J=I/H

Overhead allocated to each product	Squeaky	Silent	Note
Direct Labor costs	80,000.00	20,000.00	K
Predetermined OH Rate	0.86	0.86	See J
Overhead allocated to each unit	68,800.00	17,200.00	L=K*J

Income Statement	Squeaky	Silent	Total
Sales Revenue	138,000.00	154,000.00	292,000.00
Direct Materials	19,000.00	22,000.00	41,000.00
Direct Labor	80,000.00	20,000.00	100,000.00
Overhead costs	68,800.00	17,200.00	86,000.00
Operating Profit (Loss)	(29,800.00)	94,800.00	65,000.00
Administration cost			20,000.00
Net Profit (Loss)			45,000.00