(a) Determine the cost of the bicycle if indirect costs are allocated with direct labour hours as an allocation base. (b) Determine the cost of the bicycle if indirect costs are allocated with direct machine hours as the allocation base. (c) There are potentially many allocation bases that a company could use: direct labour hours, direct machine hours, direct labour dollars, etc. Explain how companies should choose the most applicable allocation base.
Veta Enterprises GmbH makes custom-built bicycles in Germany. The following are predicted to occur during the forthcoming year, which is about to commence.
For the year 2021
Direct materials $10,000
Direct Labour $32,000
Total direct cost $42,000
Indirect labour cost $5000
Rent $2000
Insurance $1000
Indirect materials $400
Other indirect cost $200
Total Indirec cost $10,200
Direct labour time $4,000 hours
Machine time 600 hours
All direct labour is paid at the same hourly rate.
Peter Preat wants Veta Enterprises to make a bicycle for his son. Veta estimates that the bicycle will require materials and components that will cost e1,000. It will take 50 direct labour hours and 10 direct machine hours to make the bicycle.
(a) Determine the cost of the bicycle if indirect costs are allocated with direct labour hours as an allocation base.
(b) Determine the cost of the bicycle if indirect costs are allocated with direct machine hours as the allocation base.
(c) There are potentially many allocation bases that a company could use: direct labour hours, direct machine hours, direct labour dollars, etc. Explain how companies should choose the most applicable allocation base.
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