Question

Linden, Inc. uses a 5,000 square foot factory space that it rents for $2,500 a month for all its manufacturing activities. Linden has decided to switch to an activity-based costing system, and has identified its activities as follows: Preparation and Setup, Machining, Finishing, and Quality Control. 500 square feet of the factory are used for machining, while 2,000 square feet (each) are used for Preparation and Setup and Quality Control. Finishing uses 500 square feet. When assigning indirect costs to each activity, how much factory rent should be assigned to the Preparation and Setup cost pool?]

Answer 1

Answer:

$1000

Explanation:

Total factory rent is $2500 for 5000 sq ft. The basis for assigning the rent cost to different activities will be on the basis of factory area used.

Factory area used by different activities is as follows,

1. Machining    500 sq ft

2. Preparation & Setup    2000 sq ft

3. Quality Control      2000 sq ft

4. Finishing    500 sq ft

So, The cost that will be assigned to the Preparation and setup cost will be

$2500 * 2000/5000 = $1000