Use the 2006 Form 10-K for Pepsi Bottling Group to complete the requirements below. Pepsi Bottling Group (PBG) is a separate company from PepsiCo, so do not confuse them. To obtain the Form 10-K you can use the EDGAR system following the instructions in Appendix A, or it can be found under “Investor Relations” link on the company’s corporate website: www.pbg.com. The company includes its Form 10-K as a part of its 2006 Annual Report, or it can be found separately under “SEC Filings.” Be sure to read carefully the following sections of the document.

Under “Item 1. Business” read subsections titled “Introduction,” “Principal Products,” “Raw Materials and Other Supplies,” and “Seasonality.”

In the footnotes section of the report, under “Note 2—Summary of Significant Accounting Policies,” read the subsections titled “Advertising and Marketing Costs” and “Shipping and Handling Costs.”

“Note 8—Property, Plant and Equipment, net,” in the footnotes section of the report.

Required

a. Does PBG consider shipping and handling costs and advertising and marketing costs to be direct or indirect costs in relation to the manufacturing of its products? Explain.

b. Assume that when PBG ships orders of bottled drinks each shipment includes several different products such as Pepsi, Lipton tea, and Starbucks Frappuccino. If PBG wanted to allocate the shipping costs among the various products, what would be an appropriate cost driver? Explain the rationale for your choice.

c. Assume that PBG incurs some advertising cost that cannot be directly traced to a single product such as Pepsi or Diet Pepsi. If PBG wanted to allocate the advertising costs among the various products being advertised jointly, what would be an appropriate way of making this allocation? Explain the rationale for your choice.

d. As Note 8 indicates, PBG computes depreciation expense on three separate classes of assets. For which of these classes of assets could its depreciation expense be directly traced to the production of soft drinks? Which class would least likely be traceable to the production of soft drinks? Explain.

e. Based on PBG’s discussion of the seasonality of its business, should the depreciation of production equipment recorded in a given month be based on the volume of drinks produced that month, or should the depreciation be one-twelfth of the estimated annual depreciation PBG expects to incur? Explain your answer.