Alonzo Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product line, the controller, YuYu Ortega, has developed the following information:

Total estimated overhead costs for the two product lines are $840,000.
Instructions
(a) Calculate the overhead cost assigned to the car wheels and truck wheels, assuming that direct labour hours is used to allocate overhead costs.
(b) YuYu 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:

Calculate the activity-based overhead rates for these three cost pools.
(c) Calculate the cost that is assigned to the car and truck product lines using an activity-based costing system, given the following information:

(d) What do you believe YuYu should do?

Transcribed Image Text:

Car 40,000 Truck 10,000 Estimated wheels produced Direct labour hours per wheel Activity Cost PoolsExpected Use of Cost Drivers Setting up machines Assembling Inspection Estimated Overhead Costs $260,000 280,000 300,000 500 set-ups 35,000 labour hours 600 inspections Expected Use of Cost Drivers per Product Car Number of set-ups Direct labour hours Number of inspections 100 20,000 50 Truck 400 15,000 550