Altex Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assigning to each product line, the controller, Robert Hermann, has developed the following information. CarTruck
Estimated wheels produced40,00010,000
Direct labor hours per wheel 1 3
Total estimated overhead costs for the two product lines are $770,000.
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 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.
Activity Cost PoolsExpected Use of Cost DriversEstimated Overhead Costs
Setting up machines1,000 setups $220,000
Assembling 70,000 labor hours280,000
Inspection 1,200 inspections270,000
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
CarTruck
Number of setups 200800
Direct labor hours 40,00030,000
Number of inspections100 1,100
d. What do you believe Hermann should do?