E17-4 - Assign overhead using traditional costing and ABC
Altex Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to
assign to each product line, the controller, Robert Hermann, has developed the following 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 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 wheels product line because of its complexity. He therefore develops
the following three activity cost pools and related cost drivers to better understand these costs.
				Expected Use of				Estimated Overhead
	Activity Cost Pools			Cost Drivers				Costs
	Setting up machines			1,000 setups				$220,000
	Assembling			70,000 labor hours				280,000
	Inspection			1,200 inspections				270,000
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
						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?
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .
(a)	Direct labor hours for car wheels					Value
	Direct labor hours for truck wheels					Value
	Total Direct labor hours					?
	Total estimated overhead					Value		Expected Use of Drivers
	Total direct labor hours					Value
	OH rate/DLH					?
	Overhead assigned:
						Car wheels		Truck wheels
	Direct labor hours					?		?
	Overhead rate / direct labor hour					?		?
	Total OH assigned					?		?
						Expected Use		ABC OH
(b)	Activity Cost Pool			0		of Cost Drivers	=	Rate
	Setting up machines			Value		Value		?	/setup
	Assembling			Value		Value		?	/labor hour
	Inspection			Value		Value		?	/inspection
(c )	Car Wheels
				Expected Use of	x	ABC OH	=	Cost
	Activity Cost Pool			Cost Driver/Unit		Rates		Assigned
	Setting up machines			Value		Value		?
	Assembling			Value		Value		?
	Inspection			Value		Value		?
	Total cost assigned							?
	Truck Wheels
				Expected Use of	x	ABC OH	=	Cost
	Activity Cost Pool			Cost Driver/Unit		Rates		Assigned
	Setting up machines			Value		Value		?
	Assembling			Value		Value		?
	Inspection			Value		Value		?
	Total cost assigned			?		?		?