Altex Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product line, the controller, Robert Hermann, has developed the following information.
|
Car
|
Truck
|
|
Estimated wheels produced
|
40,000
|
10,000
|
|
Direct labor hours per wheel
|
1
|
3
|
Total estimated overhead costs for the two product lines are $770,000.
Instructions
(a) Compute the overhead cost assigned to the car wheels and truck wheels, assuming that direct labor hours is used to allocate overhead costs.
(b) Hermann is not satisfied with the traditional method of allocating overhead because he believes that most of the over he costs relate to the truck wheel product line because of its complexity. He therefore develops the following three activity cost pools and related cost drivers to better understand these costs.
|
Expected Use of
|
Estimated Overhead
|
|
Activity Cost Pools
|
Cost Drivers
|
Costs
|
|
Setting up machines
|
1,000 setups
|
$220,000
|
|
Assembling
|
70,000 labor hours
|
280,000
|
|
Inspection
|
1,200 inspections
|
270,000
|
Compute the activity-based overhead rates for these three cost pools.
(c) Compute the cost that is assigned to the car wheels and truck wheels product lines using an activity-based costing system, given the following information.
|
Expected Use of Cost Drivers per Product
|
|
Car
|
Truck
|
|
Number of setups
|
200
|
800
|
|
Direct labor hours
|
40,000
|
30,000
|
|
Number of inspections
|
100
|
1,100
|
(d) What do you believe Hermann should do?