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 $ 149,000 $ 170,000 $ 319,000 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 15,000 Distribution 20,000 Operating profit $ 78,000 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 30 30 Distribution Number of units shipped 80,000 120,000 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

note:

first let us find out the ABC rates:

activity	calculation	activity rate	allocation to squeaky	allocation to silent
setting up	(production setup / (total number of production runs)= (45,000 / (10+20))	$1,500 per production run	$1,500*10= $15,000	$1,500*20= $30,000
performing quality control	(quality control / total inspections)=> (15,000 / (30+30))	$250 per inspection	$250*30= $7,500	$250*30=$7,500
distribution	(distribution / number of units)=>(20,000 / 200,000)	$0.10 per unit	$0.10*80,000= $8,000	$0.10*120,000=$12,000
administration	(administration / direct labour cost)=>(20,000/100,000)	$0.20 per direct labour $	$80,000*0.20=$16,000	$20,000*0.20=$4,000

a.income statement using activity bases:

account	squeaky	silent	total
sales revenue	$149,000	$170,000	$319,000
direct materials	19,000	22,000	41,000
direct labour	80,000	20,000	100,000
overhead costs:
administration	16,000	4,000	20,000
setting up	15,000	30,000	45,000
performing quality control	7,500	7,500	15,000
distribution	8,000	12,000	20,000
Total overhead cost	$46500	$53,500	100,000
operating profit (loss) (sales revenue - costs)	$3,500	$74,500	$78,000

c.restating income statement using direct labour cost as the only allocation base:

account	squeaky	silent	total
sales revenue	$149,000	$170,000	$319,000
direct materials	19,000	22,000	41,000
direct labour	80,000	20,000	100,000
overhead costs (100,000 * 80,000 /100,000) , (100,000*20,000/100,000) allocation on the basis of direct labour costs	80,000	20,000	100,000
operating profit (loss)	($30,000)	$108,000	$78,000