(LO 1, 2), AN Altex Inc. manufactures two products: car wheels and truck wheels.
ID: 2541644 • Letter: #
Question
(LO 1, 2), AN Altex Inc. manufactures two products: car wheels and truck wheels. To determine ount of overhead to assign to each product line, the controller, Robert Hermann, has developed the following information. Car Estimated wheels produced Direct labor hours per wheel Truck 10,000 40,000 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 assign overhead costs. b. Hermann is not satisfied with the traditional method of allocating overhead because he believes that most of the overhead costs relate to the truck wheels product line because of its complexity. He therefore develops the following three activity cost pools and related cost drivers to better under- stand these costs. Estimated Overhead Costs $220,000 280,000 270,000 Estimated Use of Activity Cost Pools Setting up machines Assembling Inspection Cost Drivers 1,000 setups 70,000 labor hours 1,200 inspections Compute the activity-based overhead rates for these three cost pools. Compute the cost that is assigned to the car wheels and truck wheels product lines using a costing system, given the following information.Explanation / Answer
a).
Car
Truck
Estimated Wheels Produced
40,000
10,000
Direct Labor hours per wheel
1
3
Total Hours
40,000
30,000
Ratio
4
3
Overhead Cost
$770,000
Overhead cost assigned
$440,000
$330,000
b). Activity Based Overhead Rates :
Activity Cost Pools
Estimated Overhead costs (A)
Estimated use of cost drivers (B)
Overhead Rates (A/B)
Setting up machines
$220,000
1,000 Setups
$ 220 per setup
Assembling
$280,000
70,000 labour hours
$ 4 per hour
Inspection
$270,000
1200 inspections
$ 225 per inspection
Car
Truck
Estimated Wheels Produced
40,000
10,000
Direct Labor hours per wheel
1
3
Total Hours
40,000
30,000
Ratio
4
3
Overhead Cost
$770,000
Overhead cost assigned
$440,000
$330,000
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