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 40,000 Truck 10,000 Estimated wheels produced Direct labor hours per wheel 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. Activity Cost Pools Setting up machines Assembling Inspection Expected Use of Cost Drivers 1,000 setups 70,000 labor hours 1,200 inspections Estimated Overhead Costs $220,000 280,000 270,000 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. Truck Number of setups Direct labor hours Number of inspections Expected Use of Cost Drivers per Product Car 200 40,000 100 800 30,000 1,100 (d) What do you believe Hermann should do? F17.4 20.15 P21.1A + Direct labor hours for car wheels Direct labor hours for truck wheels Total Direct labor hours Value Value Expected Use of Drivers Total estimated overhead Total direct labor hours OH rate/DLH Value Value Overhead assigned: Car wheels Truck wheels ? Direct labor hours Overhead rate / direct labor hour Total OH assigned ? ABC OH 0 = Rate Activity Cost Pool Setting up machines Assembling Inspection Value Value Value Expected Use of Cost Drivers = Value Value Value /setup /labor hour /inspection (c) Car Wheels Cost Assigned Activity Cost Pool Setting up machines Assembling Inspection Total cost assigned Expected Use of Cost Driver/Unit Value Value Value ABC OH Rates Value Value Value (c) Car Wheels Cost Assigned Activity Cost Pool Setting up machines Assembling Inspection Total cost assigned Expected Use of Cost Driver/Unit Value Value Value ABC OH Rates Value Value Value ? Truck Wheels Expected Use of Cost Driver/Unit ABC OH Rates x Cost Assigned ? Value Value Activity Cost Pool Setting up machines Assembling Inspection Total cost assigned 1 Value Value Value Value ? ? (d) What do you believe Hermann should do
