Question

The Fallon Company manufactures a variety of handcrafted bed frames. The company’s manufacturing activities and related data for the current year follow.

Activity cost pool	Estimated cost	Cost driver used as allocation base	Estimated volume for cost driver
Materials handling	$400,000	Number of parts	800,000 parts
Cutting	1 200,000	Machine hours	40,000 hours
Assembly	3 000,000	Direct labour hours	150,000 hours
Wood staining	1 320,000	Number of frames stained	60,000 frames
Total cost	5,920,000

1. Compute the ABC activity rate for each activity.
2. Suppose that a single indirect cost rate based on Machine hours was used to allocate indirect costs, calculate the indirect cost rate?

Answer 1

Answer-

FALLON COMPANY
Activity based costing method
Activity Rate
Cost to be allocated	Estimated cost (a)	Estimated cost driver (b)		Activity rate (c=a/b)
	$
Materials handling	400000	Number of parts	800000	$0.50 per part
Cutting	1200000	Machine hours	40000	$30 per machine hour
Assembly	3000000	Direct labor hours	150000	$20 per direct labor hour
Wood staining	1320000	Number of frames stained	60000	$22 per frame
Total	5920000

Answer- Indirect cost rate = Total overhead costs/ Total machine hours

=$5920000/40000 machine hours

= $148 per machine hour