Altex Inc. manufactures two products: car wheels and truckwheels. To determine the amount of overhead to assign to eachproduct line, the controller, Robert Hermann, has developed thefollowing 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 truckwheels, assuming that direct labor hours is used to allocateoverhead costs.
(b) Hermann is not satisfied with the traditionalmethod of allocating overhead because he believes that most of theoverhead costs relate to the truck wheels product line because ofits complexity. He therefore develops the following three activitycost pools and related cost drivers to better understand thesecosts.
Activity CostPools Expected Use of
Cost Drivers
Estimated Overhead
Costs
Setting up machines â1,000 setups $220,000 Assembling 70,000 labor hours â280,000 Inspection â1,200 inspections â270,000
Compute the activity-based overhead rates for these three costpools.(c) Compute the cost that is assigned to the carwheels and truck wheels product lines using an activity-basedcosting 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?
Altex Inc. manufactures two products: car wheels and truckwheels. To determine the amount of overhead to assign to eachproduct line, the controller, Robert Hermann, has developed thefollowing 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 truckwheels, assuming that direct labor hours is used to allocateoverhead costs.
(b) Hermann is not satisfied with the traditionalmethod of allocating overhead because he believes that most of theoverhead costs relate to the truck wheels product line because ofits complexity. He therefore develops the following three activitycost pools and related cost drivers to better understand thesecosts.
| Activity CostPools | Expected Use of Cost Drivers | Estimated Overhead Costs |
|---|---|---|
| Setting up machines | â1,000 setups | $220,000 |
| Assembling | 70,000 labor hours | â280,000 |
| Inspection | â1,200 inspections | â270,000 |
Compute the activity-based overhead rates for these three costpools.(c) Compute the cost that is assigned to the carwheels and truck wheels product lines using an activity-basedcosting 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?
