Spring 2018 Altex Inc. manufactures two products: car and truck wheels. To deter

Question

Spring 2018 Altex Inc. manufactures two products: car and truck wheels. To determine the amount of overhead to assign to each product line, the controller, Robert Hermann, has developed the following information. Truck Car Estimated wheels produced 40,000 10,000 Direct labor hours per wheel Total estimated overhead costs for the two product lines are $700,000 Hermann is not satisfied with the traditional method of allocating overhead because he believes that most of the overhead 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. Ex 1,000 setups Setting up machines Assembling Inspection $180,000 70,000 labor hours 280,000 1,200 inspections 240,000 A) Compute the activity-based overhead rates for these three cost pools. B) Compute the cost that is assigned to the car and truck product lines using an activity-based costing system, given the following information. Car Truck 800 Number of setups Direct labor hous 40,000 Number of inspections 100 200 30,000 1.100

Explanation / Answer

Req A: STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL Activity Total Expected Activity ACTIVITY COST POOL Measures Overheads Activity Rate Setting up machines Setups 180,000 1,000 180 per setup Assembling Labour hours 280,000 70,000 4 per labour hour Inspection Inspections 240,000 1,200 200 per inspection Req B: CAR TRUCK Activity rate Expected use Amount Expected use Amount Setting up machines 180 200 36000 800 144000 Assembling 4 40000 160000 30000 120000 Inspection 200 100 20000 1100 220000 Total 216000 484000 Overheads assigned Car $216,000 Truck $484,000

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