Pepper\'s Products manufactures and sells two types of chew toys for pets, Squea

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 Silent $158,000 21,000 20,000 Total Sales revenue Direct materials Direct labor Overhead costs Squeaky $140,000 21,000 80,000 $298,000 42,000 100,000 Administration Production setup Quality control Distribution 20,000 42,000 19,200 20,000 $ 54,800 Operating profit 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

Explanation / Answer

note:

first let us find out the ABC rates:

a.income statement using activity bases:

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

activity calculation activity rate allocation to squeaky allocation to silent setting up (production setup / (total number of production runs)=> (42,000 / (10+18)) $1,500 per production run $1,500*10=>$15,000 $1,500*18=>$27,000 performing quality control (quality control / total inspections)=> (19,200 / (40+40)) $240 per inspection $240*40=>$9,600 $240*40=>$9,600 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

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