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	$	145,000		$	155,000		$	300,000
Direct materials		19,000			18,000			37,000
Direct labor		70,000			30,000			100,000
Overhead costs
Administration								20,000
Production setup								64,000
Quality control								15,000
Distribution								20,000
Operating profit							$	44,000

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	22
Performing quality control	Number of inspections	30	30
Distribution	Number of units shipped	80,000	120,000

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.

Answer 1