Question

# The Fallon Company manufactures a variety of handcrafted bed frames. The company’s manufacturing activities and related...

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?

 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

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