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CoursHeroTranscribedText: could cause EZ (109-1,5, 0) 9-49. Comparative Income Statements and Management Analysis 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 $43,200 $48,000 $91,200 Salos revenue.... . . . . . ."... Direct materials..... . .. . 4.000 4,000 8,000 Direct labor.... . .. .... .# 9.600 14,400 24,000 Overhead costs.... .. . . ..... 6,000 Administration. .. . . .. . Production setup ... .. . ....8. 12,000 Quality control . . . . . . . . 6,000 Distribution.. . . . . 4,800 Operating profit .... . . . . . . $30,400 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 Performing quality control . ... .. Number of Inspections 30 10 Distribution..... .. . .. . Number of units shipped 16,000 24,000 Required Complete the income statement using the preceding activity bases Write a report indicating how management might use activity-based costing to reduce costs. G Restate the income statement for Pepper's Products using direct labor costs as the only overhead allocation base d. Write a report to management stating why product line profits differ using activity- based costing compared to the traditional approach. Indicate whether activity-based costing provides more accurate information and why (if you believe it does provide more accurate information). Indicate in your report how the use of labor-based over- head allocation could cause management at Pepper's Products to make suboptimal decisions

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