MANUFACTURING, COST CLASSIFICATION, INCOME STATEMENT SERVICE FIRM PRODUCT COSTS AND SELLING AND ADMINISTRATIVE COSTS, INCOME STATEMENT Pop’s Drive-Thru Burger Heaven produces and sells quarter-pound hamburgers. Each burger is wrapped and put in a ‘‘burger bag,’’ which also includes a serving of fries and a soft drink. The price for the burger bag is $3.50. During December, 10,000 burger bags were sold. The restaurant employs college students part-time to cook and fill orders.

There is one supervisor (the owner, John Peterson). Pop’s maintains a pool of part-time employees so that the number of employees scheduled can be adjusted to the changes in demand. Demand varies on a weekly as well as a monthly basis.

A janitor is hired to clean the building early each morning. Cleaning supplies are used by the janitor, as well as the staff, to wipe counters, wash cooking equipment, and so on. The building is leased from a local real estate company; it has no seating capacity.

All orders are filled on a drive-thru basis.

The supervisor schedules work, opens the building, counts the cash, advertises, and is responsible for hiring and firing. The following costs were incurred during December:

Hamburger meat $4,500 Buns, lettuce, pickles, and onions 800 Frozen potato strips 1,250 Wrappers, bags, and condiment packages 600 Other ingredients 660 Part-time employees’ wages 7,250 John Peterson’s salary 3,000 Utilities 1,500 Rent 1,800 Depreciation, cooking equipment and fixtures 600 Advertising 500 Janitor’s wages 520 Janitorial supplies 150 Accounting fees 1,500 Taxes 4,250 Pop’s accountant, Elena DeMarco, does the bookkeeping, handles payroll, and files all necessary taxes. She noted that there were no beginning or ending inventories of materials. To simplify accounting for costs, Elena assumed that all part-time employees are production employees and that John Peterson’s salary is selling and administrative expense. She further assumed that all rent and depreciation expense on the building and fixtures are part of product cost. Finally, she decided to put all taxes into one category, taxes, and to treat them as administrative expense.

Required:

. Classify each of the costs for Pop’s December operations using the table format given below. Be sure to total the amounts in each column. The row for ‘‘Hamburger meat’’ is filled in as an example.

Cost Direct Materials Direct Labor Manufacturing Overhead Selling and Administrative Hamburger meat $4,500 Total

. Prepare an income statement for the month of December.

. Elena made some simplifying assumptions. Were those reasonable? Suppose a good case could be made that the portion of the employees’ time spent selling the burger bags was really a part of sales. In that case, would it be better to divide their time between production and selling? Should John Peterson’s time be divided between marketing and administrative duties? What difference (if any) would that make on the income statement?

Problem